Is this an early indicator the real estate market may improve?

Discussions of whether real estate is ready to rally higher have been building in some circles. Here's one indicator that might (emphasize might) support that suggestion - IYR, the exchange-traded fund for tracking real estate, now shows up as one of the three "top bearish" in the ISE's put/call data. Its ISEE rating is actually down to "5" as measured by 3,425 puts over just 183 calls. Normally, when sentiment grows this bearish on an asset, it's a signal that there's far too much pessimism, and that it's time to take the contrarian view. In this case, it may be an early sign that the homebuilders and real estate may be ready to move up soon.

However, I would never use this single data point to sound the "all clear" for real estate. For example, it's possible that some big investors or traders may be using put options on IYR as a way to hedge long positions in individual companies or components of this sector. So one should always do diligence before making an investment or trade decision.

What about chart analysis? It's obvious that real estate has fallen very, very far, so it isn't surprising that the IYR still looks, shall we say, dismal. However, it has been in a consolidation pattern for a few months now. And there are a few faint signs of hope. One is the RSI indicator showing divergence (which you can see where the RSI indicator did not make a new low, at the same time the IYR price did make a new low). Another is that IYR's 50-day moving average has begun to curve upward. That doesn't mean that IYR has completely bottomed and is ready to move only upward from now on. But it does suggest that the IYR price might have a realistic chance to try moving up to at least test its 200-day moving average. Finally, and perhaps most helpful, the volumes as shown on the weekly chart do actually show greater volumes on the rise up from the November lows. Although the volumes on the swoon since then were not small, they do appear to be less than the amount of volumes on the rise. That explains why the technical indicators on the daily chart have begun to show signs of improvement.

Here are the charts:




So, the contrarian would say that it may be time for the real estate sector to move. But the weekly and monthly charts don't give any comfort that any upward movement would have staying power. So, make no mistake about this - only the most hardy of investors or traders might want to consider acting on these faint signs of life. There's no assurance that any move up would be anything more than a counter-trend bear market rally.