MKM: Sell REITs, Buy Utilities

August 10, 2015

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In a report issued Sunday, MKM Partners’ Executive Director and Chief Market Technician, Jonathan Krinsky, shared his weekly technical strategy. This week, the expert recommends selling the REITs and buying utilities.

Krinsky explains that, while a late Friday surge kept the S&P 500 INDEX (INDEXCBOE:SPX) from closing below its 200-day moving average, the Dow Jones Industrial Average (INDEXDJX:.DJI) closed lower for the seventh consecutive day — its longest down-streak since 2011.

The expert notes that “a bounce may materialize in the near term, [but] breadth continues to deteriorate as the trend becomes more ambiguous.” The firm still sees 2040 as key support for the S&P 500.

The note continues, “As the equity market tries to decide whether the Fed will move in September, the yield curve continues to flatten. In last week's note, we suggested Utilities were showing early signs of relative strength and, as the only sector to gain ground over the last five days, they are likely to gain more attention this week.”

The firm assures that an interesting way to assess the market's risk tolerance is by looking at two industries that are fairly sensitive to interest rates: Utilities and REITs.

What MKM is seeing now is a “more defensive posturing” by Utilities and, “in addition to being a cautious sign for the broad market,” the experts think a good pair trade here is to be long Utilities SPDR (ETF) (NYSE:XLU) and short iShares Dow Jones US Real Estate (ETF) (NYSE:IYR).

Finally, the analysts notice that “Chemical stocks are breaking down” and would thus be sellers of the group. In Emerging Markets, they highlight’s Brazil’s return to 2008 lows in USD terms. This “may offer a tactical bounce, although the primary trend remains bearish.”