Every Trader, Institutional or Retail, is always on the lookout for the next secret that will generate profits. The Hedge Fund and Institutional Quantitative Analysts have joined the lookout as well and they are applying hard core PHD level mathematics trying to uncover the next money making secret.
Today we will be analyzing Realty Income Corp (O:NYSE) as per our readers request on the Free Stock Analysis For Your Portfolio service on BehindWallStreet.com.
The Hedge Fund Secret For Easier Profits is to combine Fundamental, Technical and Quantitative analysis with Market Sentiment to generate a ‘market thesis’ that will identify the path of least resistance. (note that there is no such thing as easy money but we can find ways to make that process easier)
The 4 types of analysis (fundamental, technical, quantitative, market sentiment) gives us different clues about where the stock most likely wants to go and the more clues you can gather, the better the odds of nailing the correct thesis.
Remember that there are no certainties in the markets, we are dealing with probabilities. Mastering all 4 types of analysis is a lot of work but that’s why you hire specialist like the team at BehindWallStreet.com to do the work for you.
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Let’s take a look at the 7 year weekly chart.
Realty Income Corp (O:NYSE) made a low around the $12 area in 2009 and has sky rocketed to $54 in May 2013, for a gain around 350%. The 7 year chart looks very attractive at first glance but we believe that the $54 high in May 2013 will be the stock’s high for a very long.
We don’t like seeing stocks like O:NYSE that consistently climb on their moving averages without a natural pullback. That type of action suggests that the stock is IN-PLAY and when the stock eventually turns, as is did in May 2013, then the stock will get slaughter as all the Players leave that stock and find something else to push up. That’s just how the game is played.
The Major Players in that stock left a huge technical finger print on Realty Income Corp (O:NYSE). Look at the weekly chart where I highlighted the massive Volume print and the exhausted RSI extremes. When a stock surges over 350% in a 4 year period, that move typically ends with extremes in Volume, RSI and price action and in this case, all 3 clues appear around the same area in the chart. That’s a very bad omen if you are Long.
Now let’s drill down to the details in the Daily chart for Realty Income Corp (O:NYSE).
The daily chart provides us with a Trading Lesson: When a Fibonacci point, especially the 38.2% meets the 50day Moving Average and becomes the 1st major resistance point on the 1st major bounce then the move will most likely continue. Meaning that this stock wants to go down. You won’t see this lesson anywhere in a trading book because I combined a lot of trading rules and personal observations (try watching trading screens for 13 years) to come up with this rule.
The RSI also supports our thesis. The RSI pattern changed and showed signs of a reversal but I will leave lessons on RSI analysis for another article.
Did you also notice that the 50day Moving Average crossed below the 200day Moving average in August. This is more evidence that this stock isn’t done going down.
All signs point towards a major trend change and the new trend appears to be pointing down.
Realty Income Corp (O:NYSE) business is all about generating Dividends and the company has a 44 year track record of providing dependable monthly income, generated by a portfolio of over 3,600 properties under long-term leases. (http://www.realtyincome.com/).
The first thing I noticed is that the stock has a P/E of 55.24 and this means that this stock is being followed by the Momentum group. This is not a value play and we prefer that our dividend plays to be followed by the Value group.
The rules change when a Dividend producing business is being propped up by the momentum camp. Sure the 5.56% Dividend is attractive but in comparison to the actual and potential volatility in the stock price, you are chasing a 5.56% dividend while assuming massive risk. The stock is approximately 30% off from its highs. A 5.56% dividend doesn’t offer enough protection from a 30% drop in 4 months.
When a stock shift from a Value play and turns into a Momentum play then all valuations go out the door. It becomes more effective following the technicals of the stock. I don’t make the rules, years of watching trading screens have infused the quirky rules into my head.
Realty Income Corp (O:NYSE) is a Dividend producing stock that is displaying the characteristics of a dangerous momentum stock.
If you are looking for a momentum play then this stock is surely up your alley.
If you are looking for a safe Dividend stock then I’m afraid that you will be saddled with massive volatility in the near future.
From a Technical standpoint, the path of least resistance is on the DOWN side and we believe that the $54 high for Realty Income Corp (O:NYSE) will be the high for a very long time.
If we can get above that high, then Realty Income Corp (O:NYSE) will be off to the races. But for now, be careful with this stock, it is priced to move and movement isn’t what you want when your main objective is to collect your 5.56% Dividend that Realty Income Corp (O:NYSE) is currently offering.
This is a cursory look Realty Income Corp (O:NYSE), and we are not making any specific buy or sell recommendation but merely voicing our opinion of the current situation. Each individual investor must conduct their own due diligence of both the company, the market sector as well as their own financial situation and risk parameters.
Originally published at: BehindWallStreet.com