It isn't as important to buy as cheap as possible as it is to buy at the right time. - Jesse Livermore
One of investors' darlings, the real estate sector, seems poised to continue outperforming the overall market. For instance, since its inception, Real Estate Select Sector SPDR Fund (NYSEARCA:XLRE) knew only one thing: to push for new highs.
Central banks continue to ease around the world. The Fed already did it twice this year, and most recently the RBA in Australia lowered the cash rate to a historic low: 0.75%.
As I mentioned in the last Lead-Lag Report, such conditions make real-estate yields look especially attractive, with industrial and rental REITs looking strong. According to a JLL Research paper, in Q2 2019, the US industrial vacancy rate remains steady at 5% while rents continued to climb in the second quarter. The pre-leasing rates trend looks steady too.
Have you ever thought about demographics and interest rates? A recent study shows that demographics help to predict interest rates. If it predicts low interest rates into 2040, as the chart below implies, the obvious thing to do is to continue investing in real estate as banks will partner up with their capital at low fixed costs. On top of that, rents most likely will continue to grow.
As Jesse Livermore put it, buying cheap is not the only game in town. Buying at the right time is as valuable.
Beware of running corrections. The waves theory tells us that the market sums up all investors' expectations, and it moves in waves based on greed, fear, human nature stuff.
A textbook running correction looks like the blue lines on the right side of the chart below. The market advances, pause a bit, then explodes higher. Next, it consolidates in a triangular pattern. Then boom! An extension follows as traders try to pick a top in overbought areas. Not wise!
Such a pattern is called a running correction. It has two simple corrective phases, connected by an intermediate structure that channels well. Everything labeled abc-x-abc is a running correction.
The name tells us everything. While most corrections end up in the territory of the previous swing (i.e. wave 1), a running correction ends up higher. Much higher. Its beauty is that it caught traders by surprise, as everyone else already counted five waves. In reality, the end of the running correction only signals the start of the most extended segment of a strong move.
Sounds complicated? Here's the running correction on the XLRE chart.
The first abc shows a counter-trend strength. Next, the x-wave channels almost perfectly. Finally, a triangle forms and the market explodes higher.
A move below the 30 mark challenges this assertion. In fact, it invalidates the scenario as no parts of the 3rd wave should move below the end of the 2nd wave.
I won't make any prediction. But with central banks on an easing frenzy, in the meantime, you are here!
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