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Alessio Rastani: 3 troubling charts for real estate investors

by LLP Editor
11th May 14 6:10 pm

Is now the right time to invest in property?

Real Estate has been booming in London and certain parts of the US.

However, there may be signs of “cracks” beginning to appear in the housing market.

On Monday, billion-dollar “bond guru” Jeffrey Gundlach dropped this bombshell:

“I recommend that you short the homebuilders ETF [exchange-traded fund]”, Gundlach said at a conference in New York.

By “shorting” Gundlach was referring to the financial strategy of making money by betting against the property market.

Interestingly, Gundlach’s bearish outlook on real estate agrees with my own short term views about the property markets.

Two weeks ago, I selected Pulte Group (PHM) as one of the stocks to short in my  Top Picks report.  Pulte engages in homebuilding services in the US and its stock (see below) is usually a good measure of how the real estate market is doing.

Personally, I do NOT expect a “crash” in the housing market.  However, I do think there are some troubling signs of a correction in the short term.

Take a look at the S&P Homebuilders ETF (XHB):

chart

You will note that the Homebuilders ETF was in a steady uptrend from 2012 tillthe early part of this year.  Only recently has XHB broken that upward trend.
A downside break of an upward trendline is bearish in nature, indicating that lower prices are coming.

Let’s take a look now at Pulte Group (PHM):

chart 2

Two things stand out about the above chart of PHM:

It has broken below the uptrend line from 2011 to 2014, and the triangular consolidation pattern broke to the downside.  Both of these “breakouts” are negative and point to lower prices.

Finally, let’s take a look at a real estate market that I am particularly interested in – because I live there:

London

Many (including myself) have called the London real estate market as being in a “bubble”.  I started investing in London at the end of the housing crash from 2009 till 2012.  But I am wary of buying any more now due to the way prices have risen so fast.

One of the best stocks to watch if you’re looking to buy in London is Savills PLC.  Its stock does a good job of reflecting market conditions in London:

Savills London chart

What I love about the chart of Savills is how it shows the warning signs of both the housing crash of 2007-2008 and the massive house price rise of 2012-2013.

Notice that both the crash and the boom were accompanied by pulse signals that sent the stock up and down in triple digits!

Right now, Savills has broken a broadening pattern (often called a “megaphone pattern”). Given its previous massive upward rally, a pullback in this stock and in London real estate would not be surprising.

Out of the above charts, PHM remains my favourite short as it is the weakest market.  Traders who want to profit from a drop in this stock can short any moves back to $19 or $20.

Long term I remain bullish on real estate, and any correction is a buy opportunity.

Alessio Rastani is a stock market trader at LeadingTrader.com. He is the self-proclaimed trader who shocked the world by declaring live on BBC News that he goes to bed “every night dreaming of the next recession” and that “Goldman Sachs, not the governments, rule the world”. He’s a controversial figure, not least because he’s a self-taught non-institutional trader with no FSA license. But he certainly isn’t shy about sharing his views. Do you agree with his words? (His words are his own and not endorsed by LondonlovesBusiness.com)

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