Sunday, October 5, 2008

Commercial real estate - a dream short?

Below is a chart of the Down Jones U.S. Commercial real estate index ($DJUSRE) with a superimposed plot of the Dow Jones U.S. Homebuilder's index ($DJUSHB):

These charts so far look nearly identical with a phase shift. The homebuilder stocks peaked in 2005 and have tanked since (down as much as 75-80)%, while commercial real estate didn't peak until 2007. I circled the "dream" segment of a leg down in the homebuilder's index, which lost over 50% in less than 6 months. When shorting, remember that a 50% move down is similar to a 100% up move for those only used to thinking in the bull camp.

During the current cycle, peak prices for residential real estate/homes began before commercial real estate prices peaked, matching the stock cycles. I believe the charts will continue to show significant symmetry and so I positioned myself to profit in what I hope will be the strongest leg down for the commercial real estate bear market.

I bought January 2009 call options on an ETF (SRS) that is designed to try to provide the double inverse return of the Index in the chart above. In other words, if the $DJUSRE goes down 10%, SRS is supposed to go up 20%, although its tracking is far from perfect. Plus, I bought options on the ETF, making this a very leveraged play with plenty of risk if I am wrong. Friday, the $DJUSRE broke below its "head and shoulders" set up pattern and if I made the right call, the fireworks/"dream" leg down has begun.

Wikinvest Wire