Why This Real Estate ETF (IYR) Is Overdue For A Correction

The iShares US Real Estate ETF (NYSE:IYR) maybe be due for a major short-term pullback, according to a historically reliable options indicator.

So say the options experts at McMillan Analysis Corp., who today published a note that their computer generated Put-Call Ratio Sell Signal has been visually confirmed by IYR’s chart (see below):

XLf-put-call-sell

As you can see above, the put-call ratio (blue line) has plummeted since early May, and is now back near its yearly lows. This indicates that bullish options bets on a volume basis are far exceeding those on the bearish side.

When a trade like this gets too crowded on one side, things tend to correct the other way. In IYR’s case, this could mean a quick and brutal downturn in the short term.

For more on put-call ratio and its value as a contrarian indicator, here’s McMillan’s explanation:

Put-call ratios are useful, sentiment-based, indicators. The put-call ratio is simply the volume of all puts that traded on a given day divided by the volume of calls that traded on that day. The ratio can be calculated for an individual stock, index, or futures underlying contract, or can be aggregated – for example, we often refer to the equity-only put-call ratio, which is the sum of all equity put options divided by all equity call options on any given day. Once the ratios are calculated, a moving average is generally used to smooth them out. We prefer the 21-day moving average for that purpose, although it is certainly acceptable to use moving averages of other lengths.

Put-call ratio is by no means a foolproof indicator, but it is a historically reliable tool for traders and investors to use to identify ETFs that are due for short-term corrections. It pays to closely monitor IYR’s share price over the next several sessions as a result.

The iShares US Real Estate ETF (NYSE:IYR) was trading at $78.88 per share on Friday afternoon, up $0.56 (+0.72%). Year-to-date, IYR has gained 2.52%, versus a 8.35% rise in the benchmark S&P 500 index during the same period.

IYR currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #2 of 20 ETFs in the Real Estate ETFs category.