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All,
What a week! The DJI fell Monday and Tuesday then opened strong
Wednesday only to lose most of the gain by the close. At that point, my
move to 75% cash last week was looking good. Then Thursday the high techs
exploded off the open and the NASD had an all time record up day and the DJI
ended in about the middle of Wednesday's trading range. By the end of
Thursday, I was wondering if my move to cash was bad <G>. Then the bottom
dropped out again Friday. In summary, both the DJI and the NASD OTC indices
were down for the week with the DJI at about the midpoint of its weekly
trading range and the NASD OTC near the bottom of its weekly range. It
looks like the DJI is making a Trader Vic type horizontal channel (HC) after
falling through the bottom of its Short Term Up Trend Channel (STUTC). It
will finally give us a trend continues signal or a trend reversal signal by
breaking out of the top or bottom of that HC, respectively. On the other
hand, the NASD OTC index closed just above the bottom of its STUTC. Either
the bottom will hold and the bull continues or it won't and the bear will
take over for a while. I don't know which will happen so, in retrospect, my
decision to go to cash was a good one <G>.
The problem is that I don't like sitting on this much cash at the low
money market yields especially if the correction drags out. Therefore, I've
started to look at some alternatives. I wanted something with more yield
then the money markets, some capital gains potential, and little downside
risk. I think the Real Estate Investment Trusts (REITs) fit the bill here.
They have been in a down trend for over a year and their average yield is
now around 8% which is much higher than the money markets. If interest
rates hold steady or drop during the year (which I think will happen), then
the REITs have to be close to their bottom on a yield basis. Therefore, the
downside risk should be small. On the upside, real estate values and rents
are on the rise. That should help the REITs earnings and the analysts are
expecting about 7% growth for the REITs this year. If we can get a 8% yield
and 7% growth, that means about a 15% annual gain. That's much better than
sitting in a money fund considering there is only a small additional risk,
but I don't want to over expose myself to REITs either. The answer for me
is to invest about 20% of my portfolio in REITs.
After scanning the REITs and looking at several charts, I've decided on
two REITs - a shopping center REIT and an apartment building REIT. The
first, Mid Atlantic Reality Trust (MRR), is a fully integrated, self managed
REIT which owns, leases, develops, redevelops and manages retail shopping
centers & commercial properties. The other, Charles E. Smith Reality
(SRW),SRW is a real estate investment trust engaged in the acquisition,
development, management and operation of multifamily properties in the
Washington, D.C. metropolitan area.
MRR at 10 1/2 is in a STUTC that I constructed from Monday's low to
Friday's high. Obviously, this isn't a well defined channel and I won't
really use it for anything until we get a lot more data. This is a fixed
income substitute and value play. MRR made a triple top of 15 in Dec97 and
Jan98. It's been in an Intermediate Term Down Trend Channel (ITDTC) ever
since then. However, I think its low of 10 last Monday on heavy volume was
the blow off bottom. At that point it was very over sold and had fallen
through the bottom of its ITDTC. When it rebounded Tuesday, it not only
climbed back into its ITDTC, it also broke through the top of its Short Term
Down Trend Channel (STDTC). The Tema PV Binary wave is rising from a very
negative peak and the Tema StochRSI turned positive last Tuesday. The
fundamentals are good with a yield of 9.9%, the P/E is 12.4 (which is the
lowest P/E in the last five years, the highest was 41.5), the EPS grew 16.5%
over the last year, the debt/equity is 1.6 which is only slightly over the
industry average, and the profit margin is 25%. I'm going to open a
position Tuesday. Since this is a value play and a fixed income substitute,
I won't set an initial target and I'll set a loose stop just under Monday's
low at 9 3/4.
SRW at 29 1/2 is in a STUTC with the top at 32 and the bottom at 29
1/8. Since this is a value play, not a momentum play, I constructed the
STUTC using with a standard deviation channel with the deviation set at 2
from the 10/8/98 low to the 12/31/98 high and extended it to the right.
There is also a Long Term Up Trend Channel (LTUTC) bottom at 27 7/8. SRW
reached an all time high of 35 3/4 on 12/31/97. It repeated that high for
the next two trading days, then went into a down trend that lasted to the
10/8/98 low that started the current STUTC. It is currently in the process
of correcting back to the bottom of the STUTC for the fourth time and is
only 1/4 above the bottom. The binary wave is at an extreme negative value
which normal means it should turn up soon. The fundamentals are good. The
current yield is 7.3%, the P/E is 13.6, the EPS grew at 18.9% over the last
year, the debt/equity is a little high at 2.9, and the profit margin is
30.6%. I'll open a position Tuesday. I also won't set a target for this
one and I'll set the stop loose below the bottom of the LTUTC at 27 3/4.
I'll send a MRR.GIF and SRW.GIF chart to everyone on the chart email
list.
JimG
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