Real estate stocks step out of the darkness

If the recession is over, will real estate stocks turn out the lights? The stock market rally off of its March low has been both spectacular and global, leaving disbelievers with an empty punch bowl. What could have been a sucker’s rally is now threatening market bears and sideline-sitters with lost profits and an uncomfortable spell of performance anxiety. Everyone remembers the origin of the U.S.-made global recession – a collapsed housing bubble and a decimated over-leveraged financial system. Accordingly, investors can be forgiven if they find the reflation trade characterized by steaming hot commodities a suspect barometer of economic vitality. But the revitalized TSX financial services sector –up 23% in the last three months – and in particular, the positive trend in real estate stocks signal that the Canadian stock market is closing the door on the bear market.

The S&P/TSX Real Estate Index has been in a Stock Trends Bullish category since the end of June and recorded healthy gains in the last two weeks. Leading the group is Calloway Real Estate Investment Trust (CWT.UN-T), H&R Real Estate Investment Trust (HR.UN-T), and Chartwell Senior Housing Real Estate Investment Trust (CSH.UN-T) - all outpacing the advancing S&P/TSX Composite Index by over 15% in the past three months. Although there remains a general weakness in trading volume among many of the REIT’s listed on the TSX, almost all are currently categorized as Stock Trends Bullish. Boardwalk Real Estate Investment Trust (BEI.UN-T), among this positive trending group, is an attractive technical trade as it moves off its current support level to set up for a stronger finish to the summer.

RioCan Real Estate Investment Trust (REI.UN-T) has stalled since peaking in its spring rally two months ago, a sign of anxiety about earnings struggles that were spelled out in second quarter results released this week. But the technical signs show the units consolidating and perhaps ready to deliver price advances ahead. Economists have tempered their words about economic recovery – an upside surprise for resource driven regions in the country give room for optimism for these funds. Improved real estate conditions sprouted in the spring, a trend that should carry through the rest of the year.

Developers are also enjoying a snappy recovery. Melcor Developments (MRD-T) is up 65% year-to-date after the stock rallied off the 13-week moving average trend line and returned to the $7.50 level last week. Trend support provides investors with timely entry signals because it verifies an existing trend and reaffirms the market’s supply and demand dynamic for an advancing stock. An improving economy will expand earnings expectations and help extend the stock’s price momentum in the latter half of the year.

Stock Trends Bullish indicators have signalled good times for the stocks and units of Canadian commercial contractors, too. Churchill Corp (CUQ-T) and Bird Construction Income Fund (BDT.UN-T) are trading along their intermediate tend line and have the potential to rally above their spring highs with the improving economy. Churchill’s stock is up 48% in 2009, and may be cued up to advance ahead of its second quarter results to be announced in a couple of weeks. A build up of positive news in the sector, including the strength of SNC-Lavalin Group (SNC-T), could help these stocks keep pace with the rally in commodity stocks.

Transports sending positive trend signals

If the market is right about its bullish commodity story, transportation and industrial stocks should be feeling some love. Investors know that the supply chain is an important barometer of real economic activity – when the goods are moving the companies that factor into the wheels of commerce enjoy a positive upside. That is why the trend of shipping stocks is a critical indicator of the market’s vitality. Dow Theory, for instance, links a bullish trend in the transports as a supporting measure of the trend in industrial stocks. Although this linkage is not an infallible measure of the market, it does provide us with a reason to focus on the emerging trends in transport and industrial stocks.

The Dow Jones Transport Index (DJT-I) has flat lined in the past two months after a rally off its bottom earlier in the year. However, it is a recent Stock Trends Bullish Crossover, indicating that the short-term 13-week moving average trend line has crossed above the long-term 40-week moving average trend line. Similarly, the S&P Industrials Index turned Stock Trends Bullish at the beginning of the month. Both indexes had been in Stock Trends Bearish trends since the beginning of 2008. The timing of this change in trend category follows the emergence of a Bullish trend for the benchmark S&P 500 Index.

Transport stocks that have been highlighted recently in Stock Trends screens include CSX Corp.(CSX-N), Overseas Shipholding Group Inc.(OSG-N), FedEx Corp. (FDX-N), and Union Pacific Corp.(UNP-N). Leading the Marine transports is International Shipholding Corp (ISH-N) which has advanced 19% since the stock’s Bullish Crossover in mid June. Although Canadian National Railways (CNR-T) and Canadian Pacific Railway (CP-T) are underperforming the group, Canadian truckers Trimac Income Fund (TMA.UN-T), TransForce Inc. (TFI-T), and Mullen Group (MTL-T) have been prized Stock Trends Bullish stocks. Stock Trends also gave a positive nod to logistics software supplier Descartes Systems Group (DSG-T) a couple of months ago.

Additional support for the bullish prospect for transports is found in the industrial sector. Leading the group is Oshkosh Corp (OSK-N) a manufacturer of industrial transports, is trading at a 52-week and outperforming the S&P 500 Index by 115% in the last three months. It turned Stock Trends Bullish at the end of May at $11.87 and is now making new 52-week highs above $26. Other land transport equipment stocks out-performing the broad market and in Stock Trends Bullish trends include Cummins Inc. (CMI-N), Greenbrier Cos. (GBX-N), and Trinity Industries (TRN-N). Caterpillar Inc. (CAT-N) is a current Stock Trends Bullish Crossover, and pleased investors this week with a positive outlook - beating earnings expectations. The stock jumped to a Tuesday high of $41.45 - 23% above last Friday’s close - before settling back its current level at $38.50. Investors are encouraged by the improved condition of these industrials. They are canaries flying in the mine shaft.

A quiet little canary Canadian investors can keep an eye on is Stella Jones Inc. (SJ-T). The stock of this industrial supplier of utility poles and railway ties has proven in the past to maintain consistent price trends. Before it turned bearish at the beginning of 2008, SJ had maintained a Stock Trends Bullish trend for over five and a half years. The stock had a Stock Trends Bullish Crossover at the beginning of June but has pulled back to its trend line support level. If the stock advances off support, investors can put another check mark next to their list of bullish indicators.

Under the Cypress Semiconductor tree

One tech stock I wish was under my Christmas tree last year: Cypress Semiconductor (NYSE:CY). The stock hit another 52-week high today making this the 18th week since late February that the stock has climbed to a new high. The stock was a Stock Trends pick in early February when it traded at $5.23 and has been on a powerful rally since. Shares reached $10.55 today and look to advance further as the tech sector gathers momentum.

First Quantum leap

Shares of First Quantum Minerals (TSX:FM) have been on a tear recently. They closed Friday up 20% on the week, and have added another 9% this morning. The stock is now trading at $68.50 - $20 more than the price the shares traded at when FM was a prominent Stock Trends Pick of the Week at the beginning of May.

DragonWave

One of the current Stock Trends TSX Portfolio holdings is giving market surfers a gnarly wave today. Dragonwave (TSX:DWI) is up 15% and reached a high of $6.01 this morning. The stock had a Bullish Crossover on May 8 when it was picked up by the model portfolio. A rebound in the market may help add to the 63% unrealized gain now logged in by DWI.