Monday, April 1, 2013

Using Mortgage REITs to Time the Market

With things appearing to get a bit dicey for the market, I’m becoming increasingly concerned. That said I recently reviewed one of my favorite indicators for assessing the risk-on/risk-off mode of the market. 

Mortgage REITs are double-digit dividend yielding equities that are generally regarded as risk-off investments. Given their fat dividend yield, these REITs tend to hold up quite well when the market undergoes corrections or rough times. 

For this exercise I like to focus on NLY, one of the largest mortgage REIT stocks. When the relative price chart for NLY is beginning to look bullish and turning up, 1) it’s time to buy the mortgage REITs, but more so 2) the stock market is likely headed for a correction (risk-off). And vice-versa, when relative price chart of NLY is looking bearish, sell the mortgage REITs and get long the market (risk-on).

Here is the weekly NLY relative price chart:


I use the MACD for buy & sell signals. A buy signal was recently triggered on February 21.

Here are results for the last six MACD signals (using total return):

As already mentioned, two things to notice: 1) SELL signals have NLY underperforming by double-digits, and 2) SELL signals have the S&P 500 performing quite well. Again, SELL signals mean it’s time to get out of NLY (risk-off) and go long the market (risk-on). Granted, it’s a small sample set, but through 2/21/2013 the S&P 500 is up 18% on average for SELL signals and -5.5% for BUY signals.

Since the most recent BUY signal on February 21, NLY has outperformed the S&P 500 by 3.9%.  Although the market is up in that time, we’ll see if this remains the case over the next several days/weeks.


  1. Mortgage REITS do not exist in a vacuum. The political environment surrounding them has changed considerably in the past year. There is good reason to doubt they will behave in the future the same way they did in the past.

  2. For this exercise I like to focus on NLY, one of the largest mortgage REIT stocks. When the relative price chart for NLY is beginning to look bullish. Marijuana Rehab

  3. High yield investors have been chasing the attractive dividend payouts offered by the mortgage REIT sector for years and years now. Unlike the high payouts from telecom, tobacco, and utilities stocks, the mortgage REIT sector is far from defensive. The effects of quantitative easing (QE) from the Federal Reserve and the potential unwinding of that QE may be adding more pressure (and risk) on a sector where the dividend can disappear on investors almost overnight. Tulsa mortgage

  4. Get mortgage information from more than one lender. Don't just go to your personal bank. Shop around for mortgages as much as possible, not only at commercial banks, but at thrift institutions, credit unions and mortgage companies. It's the only way to make sure you've found the best price on your mortgage. Simple Mortgage Calculator