INCOME

Though still widely recommended by many analysts, high-yield mortgage REITs have poor total returns this year. MoneyShow’s Tom Aspray shows you why you must look at the charts before you buy.

With another weak close on Tuesday the Spyder Trust (SPY) is now down 6.9% from its intra-day high on September 14. This does not look to bad when compared to the PowerShares QQQ Trust (QQQ), which has lost 10.7% but many of those searching for the highest yields have been hit even harder.

One of the long-term favorites of those desperate for high yields as well as TV’s best known and loudest stock picker has been Annaly Capital Management (NLY). Even though it has dropped 18.5% from its September 14 high, many are still recommending it for its current yield of 13.4%.

I began cautioning investors over a year ago to closely examine the chart and relative performance analysis of all high-yield picks. I felt then that the potential capital loss could offset their yields as their charts looked negative.

According to Morningstar.com the total return of NLY for the YTD is 0.63% versus 14.8% for a diversified REIT and 11.4% for the S&P 500. Looking out longer term the three-year total return for NLY is just 7.38%.

In mid-October the longer term outlook had weakened further suggesting that after an oversold bounce they were likely to go even lower. From its late October high to Tuesday’s low NLY has lost another13.5%. If you are long one of the mortgage REITS or are considering buying one, a look at their charts may change your mind.

chart
Click to Enlarge

Chart Analysis: The daily chart of Annaly Capital Management (NLY) shows an upward trading channel, lines a and b, that was violated on October 8. Over the next four days it dropped another 8%.

  • The chart shows that the rebound from the lows traced out a flag formation as NLY rallied from a low of $15.27 to a high of $16.20, stalling at the declining 20-day EMA.

  • This set the stage for the recent plunge to the $14 level. This level corresponds to the spike lows in 2010 and 2011.

  • The relative performance, or RS analysis has been diverging from prices, line b, since the July highs and made further new lows Tuesday.

  • The weekly RS analysis (not shown) has been negative since August.

  • The daily OBV broke through its uptrend, line c, on September 27 and the selling was heavy over the past week.

  • There is initial resistance now at $14.80-$15.20 and then at $15.60

As I have noted before Capstead Mortgage Corporation (CMO) is a $1.2 billion, Dallas-based REIT that currently yields 12.1%. It peaked at $14.59 on September 24 and has had a low this week of $11.42. This is a drop of 21.7%.

  • The next band of support is in the $10.60-$11.20 area.

  • While CMO has been forming higher highs and higher lows, the RS line has formed lower highs, line e.

  • The relative performance dropped through support, line f, on September 26 confirming the break of price support (see arrow).

  • The daily OBV formed lower highs during the summer and broke through support (line g) in late September, confirming the price action.

  • The weekly OBV (not shown) has also broken its major uptrend.

  • There is resistance for CMO now in the $12.20 to $12.60 area.

NEXT PAGE: Two Other Land Mines

Tickers Mentioned: Tickers: SPY, QQQ, NLY, CMO, ANH