Market Cycles During a Crisis
Real Estate Crisis Investing Course is coming on the 15th of April, 2020
Giant economic stimulus packages have already been announced on both sides of the Tasman.
In my previous article about COVID-19’s impact on the housing market, I mentioned we were looking into producing a course with the sole aim of helping property investors make something good of opportunities that will emerge out of this time of crisis.
Well, I am very happy to announce that our production is in full swing and two teams across Australia and New Zealand are working extended hours to pull all the research and material together for you.
In the mean time, I thought I’d give you a glimpse into one of the lessons in the section titled Crisis Investing Fundamentals. Its called Crisis & Market Cycles.
Market Cycles During a Crisis
You must already know that markets are very cyclical in nature. The cycle of boom and bust is built into the capitalist model and since 1971, it has like clock work.
I’m not going to go into what happened in 1971 and what was the significance of it and why cycles go up and down like they do. I have written some articles on our blog about market cycles and the capitalist model and I’ll included some of those links at the bottom of this lesson for you to read if you’re keen.
For now, I want to cut to the chase and show you some important market traits you need to be aware of. Now I am going to be speaking to you with my traders’ hat on and for those of you who don’t know, I used to be a high frequency trader in the currency markets for several years. One of the things I had to do as part of my day job was to stare at charts for 13 hours a day trading 3 major markets.
I built several robots that used to trade the markets on various analytical patterns ranging from momentum to pattern recognition to price action to latency trading. So I’ve developed a knack for looking at charts and just knowing what’s going on within a matter of minutes.
While I can’t teach you how to do the same through these lessons, what I can tell you is this. If you understand the fundamentals of what drives price action and speculation in the market, you can have a strong idea of what comes next – drop or rise in momentum.
Take a look at this chart for instance. This is a chart for one of the REITs on the ASX market.
I have purposely taken this screenshot till the 1st of January, 2020. The chart begins in march 2013. You can see that since 2013, this particular REIT, which in my analysis seems to be very symptomatic of the market in general experienced a bull run. Similar to the bull run demonstrated by the housing market in major cities across AU and NZ. All good.
Now as of Jan 2020, when markets opened after the New Years’ break, the world had just woken to the reality that there’s a virus thing going on in China.
Watch what happened since January 1, 2020.
Some people were still trading stocks in this REIT throughout Jan and Feb until Morrison came on the Telly and told everyone, guys, this is a bit of a shit show. See the drop. It effectively wiped out all the value accumulated since 2013 in one month.
When I wrote this lesson on Friday, the the REIT was sitting at 988.20.
That, coincides with the last known strong support from the market from back in 2014. If the REIT breaches that line, which I am sure it will, then the next line of support from the market is at the second horizontal line marked as “another area of support”.
As of 20:58 NZ time on the 23rd of March, 2020, AXP J closed below that support line at $877.40.
That will take the REIT down to 2011 levels. Breaching that line, to will be down to the lowest from 2007.
So in the previous lesson I mentioned how you can use REITs performance to get a gauge of where the RE market is heading.
This is areal example of that.
Keep an eye on this REIT by looking up ASX symbol AXPJ on Google or investing.com
Now why did I go on this technical analysis right now – well I wanted to show you something about market cycles and the natural phenomena that occurs when markets are in a state of fall.
These lines of support and resistance that you see on the charts are somehow formed by market activity and end up creating the ranges or channels between which the chart typically oscillates until it breaks down past a previous area of support or breaks out upwards through an area of resistance.
Support and resistance levels aren’t always horizontal. Sometimes, they can be diagonal as though traveling in a channel downward or a channel upward.
Knowing where these areas of support and resistances lie is an absolute essential in terms of being able to asses the next move the market is likely to make.
So if you look at the diagonal line I’ve drawn on this chart, you will see that the market never REALLY managed to break past that diagonal line which kept pushing the market down every time it tried to break past it.
It happened since 2007 and in 2016 it stayed out of the diagonal line for 9 months before coming back into the shaded area.
This is actually a classic pattern that most traders are well accustomed to.
If you look at the red line pointing to the shaded area, you will see that a triangle shape is being formed.
If you join the line to make it a triangle, you will see a flag. This is a flag pattern you are seeing in the chart. It has several interpretations and meanings and I am not going to go into it for now… we will look at charting basics in the REIT course.
But suffice it to say that the invisible hand somehow creates these patterns on a chart and all of them seem to be geometric and associated with Fibonacci sequence of numbers. Take it however you wish to, but that’s a known fact in trading circles that if you know pattern recognition, you have a natural advantage as a trader.
I was going somewhere with this… right… I wanted to show you the depth to which markets can fall.
Why should you care?
Well you should care because if you look at this classic wave pattern that’s a utopian expression of market cycles, you will never know when the troughs and peaks happen unless you have a time machine of some sort or a knack for reading charts like I’ve explained so far.
Knowing market amplitude is a way of having some logical way to get an idea of where you might be in the market cycle.
So what is amplitude?
Amplitude is the height of the wave on either side of the zero line. How far up or down before you reach the turn on either side of the line is what amplitude determines in this case.
There is no magical formula for it. There’s no set answer. It is a matter of observation, analysis, rationalisation and then more analysis, more observation and then at some point, you arrive at a hypothesis.
My purpose in talking to you about cycles in the context of crisis investing is to not get academic or overwhelm you with wave theory. I am trying to draw your attention to the nature of waves in peacetime and the nature of waves in times of crisis. If you can identify the difference in behaviour and trajectory, you will have a significant advantage in spotting the wave before it forms and ride it all the way to the top.
A quick note about riding the wave down – yes, sometimes in a crisis, you want to be the one betting on something going down in value. In markets this is known as shorting. When you short a stock, it means you’re betting for that stock to go down to a certain price. If it does, you make money.
In a crisis environment, many major stock exchanges, where REITs and other such instruments are traded either suspend trading for some time or put a ban on shorting. I know, sounds unconstitutional…right? But an exchange is a privately held business. They can do whatever they want. And so they do.
Days after the crisis was apparent, a few exchanges suspended trading of several airline stocks and some even put a ban on shorting. So if you’re thinking of shorting REITs, you can take off the cape and the vigilante mask. ITs been thought of before. Done before. Pillaged enough that most exchanges won’t let you short REITs anymore. This is only due to the current crisis. There’s nothing stopping you from shorting REITs 3 months down the line. The exchange cannot put a permanent ban on shorting. If they did, then people will just start creating pending shorts where they place orders at a lower price but further out in time, which is worse for the stock if you know what I mean.
Right…. So lets get back to amplitude of the wave.
In a paper I wrote last year, I hypothesized that as of April, 2019, my analysis was saying that the market was right where you see the Red DOT in this image.
Where do you think it is now? If you said Panic, I don’t blame you.
However, at the time of writing this lesson, in March of 2020, with thousands dying of the Covid 19 virus every day, while the people and the uneducated investor might be in panic, the market is not. The real estate market especially is not YET.
As of March, 2020, I’d place it at right where the Blue dot is.
The distance between the blue dot and Depression could be in a matter of 6-12 weeks. But how do you know when that’s going to be?
While there are no crystal balls for you to consult, let me pull you back to this chart and tell me if you can see a logical possibility from this chart of when that might be.
I’d say, when this REIT goes to around $800 I would read that as the market entering panic and when it breaks past the last pink horizontal line, that’s when I’d be considering the market getting as close it can to Depression.
Now, how certain am I. Can’t guarantee anything but based on market fundamentals, that’s what I can see. however, there are a couple of important things you need to remember.
Never underestimate the markets’ ability to remain in a state of denial. Markets have the tendency of outlasting any and all rational thinking if they are approaching a new bottom.
So in a crisis that no one has seen before, expect that the markets can breach the third support line and go deeper, beyond recession. For your property investing activities, it could mean that if you bought a target thinking the market has reached the bottom, then you need to be prepared for further decline in the value of your holdings.
This is when you need to manage your expectations and have a “stop loss” value. It could keep falling for a while… you don’t know that. Neither do I and neither does the Finance Minister. Markets are driven by emotions in times of crisis. However, if you study the chart, and observe, at each support line, the markets have a tendency of bouncing back for the short term.
Short term in this context of an REIT that’s trading on a stock exchange could be hours or minutes. Short term for the property market would mean a cycle of 6-9 months as we saw in 2016 example from this REIT’s performance.
Why are we relying so heavily on this REIT to understand market amplitude?
Well firstly because it is an REIT and not a stock. It holds real estate assets inside it and pays people dividends from the rental income it generates from this assets. It doesn’t get any more relevant than that.
Secondly, being a tradable security, you will be able to see market volatility of this asset much faster than you will be able to see market volatility of properties in the market. This is partly due to the fact that housing market data is frustratingly delayed and secondly because property transactions take longer to settle.
So two key takeaways from this lesson.
- Markets are cyclical but the amplitude of the wave that’s created by the cycle is different in times of a crisis.
- If you observe the fundamentals of the industry and analyse a corresponding REIT over a period of time, you can get a reasonable, pragmatic and logic driven vantage point of how big or small that amplitude is likely to be.
I know this lesson was quite technical and I am also aware that many of you guys aren’t traders or possibly have never even seen a chart like this before.
Please don’t allow the feeling of overwhelm consume you at this moment. Yes it seems technical, but by the time you’re done with this course, you will know a lot more and you don’t have any thing to be concerned about.
I don’t want you to get overwhelmed. I don’t want you to feel underwhelmed either. Just stay whelmed. I know that’s not even a word… but hey… I’ve got the microphone so I’m going to establish a new word today. Whelmed.
Take it in one step at a time. You’re already a cut above everyone else right now because you’re investing time in learning how to deal with something that has just landed in our world and is changing how we live and work.
You’re being proactive. You’re going to get there. Stay focused. Watch this lesson again if you want to. Ask me questions through the comment section below.
I’ve posted some links down below for you to do a bit of homework.
Looking 3 REITs in your local market. NZX, ASX or London AIM if you’re in the UK, NASDAQ in the US or BSE if you’re in India. Once you’ve found the REIT, load the chart on investing.com using the ticker symbol of the REIT.
Look it up from 2007 till now. See if the trajectory of the REIT corresponds with the housing market data for the country. In terms of housing market data, look for CAGR over 1 year, 3 years, 10 years.
While you do this, don’t be afraid of asking for help from the support team if you get stuck with something. We are here to help. I’ll catch you back in the next lesson.
The following is the transcript from Lesson 5 of the Real Estate Crisis Investing Course, which is being released on the 15th of April, 2020. The purpose of this sneak preview is to give you a glimpse of the detail with which we are approaching Crisis Investing for the Real Estate Industry.