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Real estate stock rotation

March 26, 2013

Between 2009 and 2012, Kimco Realty (KIM) was in a downtrend against Post Properties (PPS). KIM is a retail Real Estate Investment Trust (REIT) and PPS is a residential REIT.

During 2012, the ratio based and in early February, the 30 week moving average moved above the 40 week moving average for the first time since February 2009.

In my moving average crossover method, I look for crossovers following a long time since the previous cross, preferably four years. This example is just a few weeks short of that.

KIMPPS weekly

The 14 week RSI has now formed a bearish divergence, so the ratio is vulnerable to a pullback towards the moving averages.

Daily chart

KIMPPS daily

The ratio is on its second daily RSI divergence. The early March divergence led to a pullback, as did the October 2012 divergence.

I expect the pullback that started yesterday to continue over the coming weeks. Ideally, the ratio will pull back to near the top of the base and the moving averages, somewhere around 0.43 to 0.44. Given that this is a long term trend change, the unwinding from short term overbought may be more in time than price.

There are no precise entry criteria for these long term moving average crossovers. They are more suited to setting stock weightings within a long only fund than as well defined pairs trades.

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