A subscriber recently mentioned getting into a real estate ETF so we started going over the data which may suggest the Real Estate sector could become the next big trade over the next 12+ months. The news that the US Fed may decrease rates in an attempt to front-run global economic weakness and real estate market weakness may result in a waterfall event in local and regional real estate markets. This type of event could become a fantastic trading opportunity for technical traders.
Recently we have been talking about the unit and very different opportunities in other physical assets like precious metals. Each metal is unique for market timing has its own personality. Our gold predictions are an eye-opener, why silver is awesome, and our most recent analysis on platinum is timely.
Overall, our research has been focused on one of the hottest markets anywhere in the US, California. Los Angeles, Ventura County, Orange County, San Diego, and San Francisco make up the entire massive Southern California real estate market. The California real estate market is a fairly strong indicator for weaker market segments because the number of transactions taking place across the 400+ miles spanning San Francisco to San Diego represent multiple trillions of dollars, vast segments of consumers and types of housing as well as an incredibly diverse economic landscape ranging from coastal regions, farming regions, cities, technology hubs, agriculture and dozens of others (source).
Our concern is that a rate decrease by the US Fed may be interpreted as a “move to attempt to abate fear” instead of a “move to support the markets”. If this decrease in rates does happen and at-risk homeowners fear the Fed is trying to push buttons to adjust the consumer environment toward a “buying bias” and sellers become scared, then the race to sell faster (decreasing prices to attract buyers) may become the norm. In other words, in an effort to support the markets, the Fed could take actions that remove the floor from the markets as sellers attempt to get the best price possible before buyers become aware of the “race to the bottom” in terms of pricing.
At-risk homeowners are under increasing pressures as pricing, income and other expenses seem to have wreaked havoc with what was a traditionally strong real estate market just three years ago. It appears the Fed has raised rates just enough to start to show the cracks in the dam in Orange County and LA County, California. The increasing number of blue dots, as well as the continue “price drops” in these areas, are a very clear sign that the “hot market” is now just “mildly warm and cooling fast”. Prices are past the peak and are already starting to decline fairly rapidly.
Additionally, delinquency levels for commercial and industrial loans are starting to rise dramatically – much like what happened in 2007 – just months before the credit market crash in 2008. Commercial and Industrial loan delinquencies rose sharply from 1.14 in Q2 2007 to 1.45 in Q1 2008 – eventually peaking at 447 in Q3 2009. Currently, Delinquency levels are at 1.17 – up from 0.93 for Q4 2018. If this trend continues past September, we could be looking at a very different real estate economic picture by the end of 2019 or early 2020 (Source).
Our interpretation of the US housing market is that buyers are becoming more opportunistic as they are watching the markets and watching how sellers are dropping prices in an attempt to attract a sale. Buyers have not seen this type of activity since early 2007-08 or so when sellers were getting desperate to get out of their homes near the top of the market. At the same time, watching how sellers attempt to push their home into the hands of buyers creates a shifting dynamic in the Real Estate market. All the sudden it went from a seller’s market and is now shifting into a buyers market.
The rates of delinquencies, consumer confidence, and levels of disposable income all factor into the market’s reactions to price and sales activity. When buyers believe it is opportunistic to buy, they will move mountains to attempt to acquire a home or an asset. When buyers believe it is not opportunistic to buy an asset, they will likely decide to wait for a more opportunistic time to make their purchase.
In part II of this article, we will share our research that highlights the incredible trade setup related to the Real Estate market and how technical traders can position their portfolios for this move.
In part I of this research post, we highlighted how the shifting landscape of the US real estate market may be setting up an incredible trading opportunity for technical traders. It is our belief that the continued capital shift which has been driving foreign investment into US assets, real estate, and other investments may be shifting away from US real estate as tell-tale signs of stress are starting to show. Foreclosures and price drops are one of the first signs that stress exists in the markets and we believe the real estate segment could be setting up for an incredible trade opportunity.
SRS, the Proshares Ultrashort Real Estate EFT has recently completed a unique “washout low” price bottom that we believe may become an incredible trading opportunity for technical traders. If the US Fed pushes the market into a panic mode, sellers will become even more desperate to offload their homes and buyers will become even more discerning in terms of selecting what and when to buy.
Our opinion is that the recent “washout low” price bottom in SRS is very likely to be a unique “scouting party” low/bottom that may set up a very big move to the upside over the next 4 to 12+ months. If our research is correct, the continued forward navigation for the US Fed, global central banks and the average consumers buying and selling homes is about to become very volatile.
If SRS moves above the $25.50 level, our first upside Fibonacci price target and clears the $24.25 previous peak set in April 2019, it would be a very clear indication that a risk trade in Real Estate is back in play. Ideally, price holding above the $21.65 level would provide a very clear level of support negating any future price weakness below $21.50.
This weekly SRS chart highlights what we believe to be the optimal BUY ZONE and the upside price targets near $28 to $29. Since the bottom in 2009-10, after the credit market crisis, we have not seen any substantial risk in the Real Estate market for over 8+ years. Now, though, it is our opinion that this risk trade is very real and that technical trader should be aware of this potential move and what it means to protect assets and wealth.
If our research proves to be accurate and any future move by the US Fed will prompt a “rush to the exits” by home sellers, then there is really only one course of action left for us to consider. Either the Fed will reduce rates, buying some at-risk sellers a bit of time before a rush to sell overwhelms the markets and prices begin a fast decline in an attempt to secure quick buyers; or the Fed will leave rates at current levels where at-risk sellers will continue to attempt to offload their homes to any willing buyers before declining prices and panicked sellers start the “race to the bottom” in terms of pricing.
Real Estate has already run through the price advance cycle and the price maturity cycle. There is really only one cycle left to unfold at this point – the “price revaluation cycle”. This is where the opportunity lies with our suggested SRS trade setup.
We believe this bottom in SRS will result in a few more weeks of trading near price support (above $20 and below $22.50) where traders will be able to acquire their positions. The bigger move will happen as risk becomes more evident – very similar to what has recently happened in Gold. Once that risk is visible to traders/investors, the upside potentials ($28+ to $42+) won’t seem so illogical any longer.
I can tell you that huge moves are about to start unfolding not only in real estate, but metals, stocks, and currencies. Some of these super cycles are going to last years. Brad Matheny goes into great detail with his simple to understand charts and guide about this. His financial market research is one of a kind and a real eye-opener. PDF guide: 2020 Cycles – The Greatest Opportunity Of Your Lifetime
As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are massive/life-changing if handled properly.
I urge you to visit my Wealth Building Newsletter and if you like what I offer, join me with the 1 or 2-year subscription to lock in the lowest rate possible, get a FREE BAR OF GOLD and ride my coattails as I navigate these financial market and build wealth while others lose nearly everything they own during the next set of crisis’.
Chris Vermeulen has been involved in the markets since 1997 and is the founder of Technical Traders Ltd. He is an internationally recognized technical analyst, trader, and author of the book: 7 Steps to Win With Logic
Through years of research, trading and helping individual traders around the world. He learned that many traders have great trading ideas, but they lack one thing, they struggle to execute trades in a systematic way for consistent results. Chris helps educate traders with a three-hour video course that can change your trading results for the better.
His mission is to help his clients boost their trading performance while reducing market exposure and portfolio volatility.
He has also been on the cover of AmalgaTrader Magazine, and featured in Futures Magazine, Gold-Eagle, Safe Haven,The Street, Kitco, Financial Sense, Dick Davis Investment Digest and dozens of other financial websites.
Disclaimer: This material should not be considered investment advice. Technical Traders Ltd. and its staff are not registered investment advisors. Under no circumstances should any content from websites, articles, videos, seminars, books or emails from Technical Traders Ltd. or its affiliates be used or interpreted as a recommendation to buy or sell any security or commodity contract. Our advice is not tailored to the needs of any subscriber so talk with your investment advisor before making trading decisions. Invest at your own risk. I may or may not have positions in any security mentioned at any time and maybe buy sell or hold said security at any time.