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Using Technical Analysis to Manage a REIT Portfolio Part I -- The RSI Oscillator

02/14/01 10:28:27 AM
by Dr. Michael J. Seiler

Does technical trading apply to REITs? Using three classic technical indicators, I will show you how technical analysis can be effective.

Security:   N/A
Position:   N/A

Instead of tracking regular stocks like everyone else, I've been searching for technical analysis strategies that work well with Real Estate Investment Trusts (REITs). A REIT is simply a stock that holds only real estate as its assets. They are analogous to a mutual fund in that a REIT directly owns several real estate properties and diversifies by geographic location, economic diversity and property type similar to the way a mutual fund diversifies by selecting stocks in different industries.

Although there are hundreds of possible trading strategies, I've decided to choose three systems that work well under different market conditions: Relative Strength Index (RSI) oscillator, Parabolic, and Moving Average Crossover Divergence (MACD). The RSI oscillator works the best in non-trending markets, while the parabolic system works better in trending markets. MACD performs well in either market condition. RSI oscillator and Parabolic are leading indicators in that they try to predict the future movement in a market before it occurs. On the other hand, MACD is a lagging indicator that identifies a trend or trend reversal after the trend has begun.

I've divided this article into three parts with Part I discussing the RSI oscillator, Part II the Parabolic, and Part III the MACD.

Relative Strength Index (RSI) oscillator is a system that tries to determine when markets are overbought or oversold. After a strong rally, the market often corrects and prices drop. The RSI Oscillator tries to measure the degree that the market is overpriced and attempts to identify the downward correctional movement in prices. The reverse is true when markets are oversold.
RSI is calculated as follows:

RSI = 100 - 100 / 1 + (average up/average down)

averageup = the average of all price increases over the examination period,
averagedown = the average of all price decreases over the examination period.

The range of RSI is from 0 to 100. When values above 70 are reached, an overbought market is identified. When values below 30 occur, an oversold market is said to exist.

I have provided the EasyLanguage code for RSI at the end of Part I.

There are a total of 210 REITs in existence. I assembled a complete list of all REITs by classification (equity, mortgage, and hybrid), property type (diversified, health care, industrial/office, lodging/resorts, residential, retail, self storage, specialty and mortgaged backed) and sub-property type (apartment, manufactured homes, free standing, outlet center, regional malls and strip centers) from the National Association of Real Estate Investment Trusts (NAREIT). All data used in this article are end-of-day and is provided by Bonneville Market Information.

Different investors face different commission charges and are able or desire to purchase a different number of shares per trade. For these reasons, all my results are given on a per share basis and do not reflect transaction costs. You should subtract your appropriate commissions from the profitability of each strategy to find the net profitability of each trading system.

Each table provides summary information concerning the profitability of the three systems for all REITs by classification, property type, and sub-property type. The most important value in the table is the average profitability of all trades. From this number, the you should subtract your commission charged per share. In addition to overall profitability, several other summary statistics are listed. The sample size refers to the number of trades executed by each system. The larger the number the more confident I am in the results because small sample sizes are more likely to be biased.

The percent of profitable trades is also good to know. A number over 50% represents a trading strategy that is systematically better than flipping a coin. The final reported values are the gain and loss from the average winning and losing trade. These amounts are important because it breaks down where the overall profitability comes from. Also, a trading system that results in only modest gains, but has little to no downside risk is much more valuable than a system where losses can be very large.

Table 1 shows the results for the RSI oscillator. Overall, Equity REITs generated a profit of just under $.05 per share per trade. This sounds like a small number, but it represents a large profit. The average on-line brokerage firm charges roughly $10 per trade for any number of shares up to 1,000. Many brokers allow the number to be as high as 5,000 shares for this same price. Using the more conservative number of 1,000 shares, this works out to be a commission fee of $.01 per share per trade. To determine just how profitable trading Equity REITs is based on the RSI oscillator strategy, multiply the profitability per share per trade by the number of total trades made over the sample period. For Equity REITs, the gross profit is $246,233 [($.047 per share) x (1,000 shares) x (5,239 trades)] and the net profit is $193,843 [(($.047 - $.01) per share) x (1,000 shares) x (5,239 trades)]. Again, you will likely be charged different commission rates and number of shares purchased which will dramatically affect the gross and net profitability of each trading system.

Of the eight Equity REIT property types, all but one had a positive return. Also, of the nine sub-property types, only three were unprofitable. The most profitable Equity REIT category was the Free Standing sub-property classification. The average profit on all trades was a remarkable $.279, which represents a success rate almost six times that of overall Equity REITs.

Mortgage REITs and Hybrid REITs did not fair nearly as well. The RSI oscillator system was extremely unsuccessful for both REIT types. When I divided the property types into sub-property types, the results do not change. The system is unprofitable and should not be used for trading Mortgage and Hybrid REITs.

RSI Oscillator Code Construction with EasyLanguage

I. Function

Inputs: Price(NumericSeries), Length(NumericSimple);
Variables: Counter(0), DownAmt(0), UpAmt(0), UpSum(0), DownSum(0), UpAvg(0), DownAvg(0);

If CurrentBar = 1 AND Length > 0 Then Begin

    UpSum = 0;
    DownSum = 0;
    For Counter = 0 To Length - 1 Begin
      UpAmt = Price[Counter] - Price[Counter+1];
      If UpAmt >= 0 Then
        DownAmt = 0

      Else Begin
        DownAmt = -UpAmt;
        UpAmt = 0;

      UpSum = UpSum + UpAmt;
      DownSum = DownSum + DownAmt;

    UpAvg = UpSum / Length;
    DownAvg = DownSum / Length;

    If CurrentBar > 1 AND Length > 0 Then Begin
      UpAmt = Price[0] - Price[1];
      If UpAmt >= 0 Then
        DownAmt = 0

      Else Begin
        DownAmt = -UpAmt;
        UpAmt = 0;

      UpAvg = (UpAvg[1] * (Length - 1) + UpAmt) / Length;
      DownAvg = (DownAvg[1] * (Length - 1) + DownAmt) / Length;


If UpAvg + DownAvg <> 0 Then
    RSI = 100 * UpAvg / (UpAvg + DownAvg)

    RSI = 0;

II. Indicator

Inputs: Price(Close), Length(14), BuyZone(30), SellZone(70), BZColor(Green), SZColor(Magenta);

Plot1(RSI(Price, Length), "RSI");
Plot2(BuyZone, "BuyZone");
Plot3(SellZone, "SellZone");

III. Bullish Signal

Inputs: RSILength(10), OverSold(30);

If Currentbar > 1 AND RSI(Close, RSILength) Cross Over OverSold Then

    Buy ("RSI") This Bar on Close;

IV. Bearish Signal

Inputs: RSILength(10), OverBought(70);

If Currentbar > 1 AND RSI(Close, RSILength) Cross Below OverBought Then

    Sell ("RSI") This Bar on Close;

Part II - The Parabolic


Dr. Michael J. Seiler

Title: Professor of Finance
Company: Hawaii Pacific University
Address: 1132 Bishop Street; Suite 504
Honolulu, HI 96813
Phone # for sales: 808-544-0827
Fax: 808-544-0835
E-mail address:

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Date: 10/17/01Rank: 4Comment: 

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