Mortgage REITs Are Finally Showing Signs of a Trend Change

 

You don’t hear much talk about mortgage REITs these days, and for good reason, they’ve been dead money for a long time. But that’s exactly why I’m starting to pay attention now. When an area of the market has been ignored for years and then begins to show signs of life, I want to know about it. Above is a weekly chart of REM, and in the lower pane is a ratio line of REM versus SPY. That ratio line tells the real story.

For many years, REM has been in a clear downtrend relative to the S&P 500. Owning mortgage REITs simply didn’t make sense when compared to owning the broader market. Capital consistently flowed elsewhere. But look at what’s happening now. For the first time in roughly five years, the REM/SPY ratio is breaking its downtrend line. That’s a big deal. Relative strength trends don’t change often, and when they do, it usually signals an important shift under the surface.

What makes this even more interesting is that price is now confirming what the ratio line has been hinting at. If you look at the price chart of REM, you’ll see it is just now breaking through a key resistance level. I always want to see price confirm relative strength, and that’s exactly what we’re getting here. This combination of relative strength improving and price breaking out is often how new leadership begins.

When I drill down into the individual names, the picture gets even better. Stocks like NLY, TWO, and AGNC have all been acting very well since January 1st. They’ve been making higher lows, holding gains, and responding positively to buying pressure. That tells me money is clearly moving into this space. Institutions don’t tiptoe in quietly by accident.

I’m not chasing these stocks here after the initial move. My plan is simple: I want to be a buyer on a pullback. If this really is a change in trend, there should be opportunities to enter on weakness. Mortgage REITs may not be exciting, but the chart is starting to say something important and I’m listening.

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