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(Deborah Baic/Deborah Baic)
(Deborah Baic/Deborah Baic)

Technical Trends

Calloway REIT's bullish run looks to have legs Add to ...

The Stock: Calloway Real Estate Investment Trust Recent price: $22.76

Trend: Although the stock market has taken a modest positive turn recently above bearish trend lines, investors angling for a trading position in the third quarter remain clustered around defensive areas of the equity market. Gold stocks, along with traditional bear market parking spaces like consumer staples and utilities stocks, are leading performers this summer. There have been other pockets of strength - North American telecommunications stocks, for instance, have also been among the leaders. But if you are looking for stocks that have maintained a strong bullish trajectory, there is one area that should not be overlooked: the Canadian real estate sector.

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The sector has outperformed the broad TSX market by 6 per cent in the past three months and has forged ahead to new 52-week highs in each of the past six weeks. Real estate investment trusts are the engines powering this strong performance - the S&P/TSX Real Estate Investment Trust index is currently up 10 per cent from its second-quarter average price. Many of these TSX REITs are hitting new highs, including RioCan Real Estate Investment Trust and Primaris Retail REIT , whose units are up 10 per cent since being profiled in this column in late March.

More generally, many income trusts have been showing themselves as attractive instruments in the current environment. Trading volume has spiked in certain trusts as defensive investors shift toward an emphasis on stable income as the stock market jostles through an uncertain period. Indicative is the high volume of trading in the iShares S&P/TSX Income Trust ETF last week. Much of that volume is attributable to the announced change in investment objective for the ETF - ending the income trust focus as the approaching income trust tax changes come into effect to achieve a more diversified portfolio of income bearing funds. Nevertheless, the emphasis on income is an important market trend that investors should heed, and REITs still bear this banner.

The Trade: Calloway REIT is one of those REITs hitting new highs. It has broken above a $22 resistance level in the past two weeks and is now up 12 per cent since rallying off its primary trend line (the 40-week moving average) three months ago. The units have been Stock Trends Bullish since June of last year, like many of the best performing REITs. The trading in recent weeks suggests this trend has legs - investors are not too late to add these units, currently yielding 6.8 per cent, to income portfolios.

Reminding readers here that this column seeks solely to identify technical market trends and highlight particular trading patterns of stocks, ETFs and income trusts that provide an observable trading opportunity within a sector trend, this commentary does not evaluate the relative valuation of income streams inherent in this investment. However, the fund's successful unit offering completed at the beginning of August - which netted Calloway $143-million at a per unit price of $21.60 - is indicative of the sector's attractive spot as far as raising capital to fund operations and future growth. The performance of the units in August speaks of the market's nod toward the REIT's prospects.

The Upside: Technical analysts like to gauge price patterns in terms of support and resistance levels - market prices that stand as guide posts for future price movement. Calloway's units, having cleared one resistance level at $22, now have room to appreciate another 10 per cent before hitting the next long-term resistance level at around $25.80.

The Downside: Changes to the interest rate environment have a direct impact on income stream investments, and are certainly always a concern. Calloway, like other REITs, has rallied to a point where a pullback is a risk. An immediate retreat to the $20.50 area would invite concern for this trade.

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