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.