Calling for a Reversal in Income Stocks

There has been a lot of talk of the unwind of the yield stock. You have seen it in the sell off of the monster REITs like American Capital Agency ($AGNC) and stocks like Verizon ($VZ). Selling off dividend names because the Fed may stop buying bonds this year and eventually move to raise rates in 2014 by 25, 50 or 100 basis points seems insane to me. A 3% or 4% 10 year bond yield or 50bp on a money market account is not going to be enough to make up for the yields on high quality stocks at 4 or 5% and REITs closer to 10%. But hey what do I know?

One thing I do know is that the price action in these names, is showing signs that there are some traders that are thinking like I am. So lets take a look and maybe we can all be wrong together. Starting with American Capital Agency, the move off of the high less than a month ago has reached 25%. Today it printed a Hollow Red Hammer candle with a very long lower shadow. This is at the previous bottom from November. It is very extended below the Simple Moving Averages (SMA) and and the Relative Strength Index (RSI) closed under 20. These are conditions for a reversal. Look for a close back over Wednesday’s high to confirm it. For you fundamental people, it is also now trading at a 9% discount to the book value. The

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move lower has raised the dividend yield back to 18%. If you think that is not sustainable then what is? Half of that? Even at a quarter it would yield 4.5%. You can’t shake a stick at that! Verizon is of a different variety. But the technicals also point to a possible reversal soon. Having completed an extreme Crab pattern, it is nearing a 38.2% retracement of the move higher. It may continue lower but this is the first price objective out of the Crab and the next is at 45.24, the 61.8% retracement. What suggests it is time to watch now is that the RSI is moving near the technically oversold level and there has been some historic importance at the 38.2% level from late March into April. Definitely wait for the bounce but it has already raised the dividend yield up over 4% and it would reach 4.5% at the 61.8% retracement.

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