It’s been 21 months since we wrote about leading residential REIT Essex Property Trust. The pandemic had a limited effect on the company, whose sales dipped less than 4% in 2021 before bouncing up 11.5% in 2022. At the start of 2023 now, analysts expect both sales and FFO growth to continue this year and the next. After all, recession or not, people still have to live somewhere.
Given the stability and soundness of Essex Property’s business, one would expect to see a steady share price, as well. Alas, that’s not the case. ESS stock dipped below $200 earlier this week, down over 45% from its April 2022 record of $363. Apparently, the REIT’s strong fundamentals couldn’t prevent the market from cutting its valuation nearly in half in less than a year.
Our readers, however, had been warned in advance about the possibility of a major crash in ESS stock. In our article dated June 24th, 2021, we examined the stock price’s entire path since the company’s 1994 IPO. Unfortunately for the bulls, the chart below revealed an almost complete five-wave impulse pattern. According to the Elliott Wave principle, a notable correction was supposed to occur.
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With ESS at $307 in early-summer of 2021, we thought the fifth and final wave of a five-wave impulse was in progress. The pattern, labeled I-II-III-IV-V, had been developing within the parallel lines of a trend channel. Two lower degrees of the trend were visible within the structure of wave III, whose wave 4 was a running flat correction.
Wave V was expected to exceed the top of wave III, so a short-term rally to over $334 made sense. On the other hand, a three-wave correction follows every impulse. So, “instead of celebrating the new high” we thought “the bulls should take defensive measures and maybe take some profits.” The updated chart below proves that this was a good call.
Wave V ended at $363.36 on April 21st, 2022. The bears took the wheel and held on to it for the following eleven months. Yesterday, Essex Property stock traded below the $200 mark for the first time since 2020. Of course, it is easy to use the Fed’s aggressive rate hikes as an explanation for the crash now. But the Fed didn’t start raising rates until March, 2022. Elliott Wave analysis helped us predict the bearish reversal and crash in ESS nine months in advance.
Now, the plunge from $363 to $199 can be seen as another five-wave impulse, marked 1-2-3-4-5. The way we’ve shown it on the chart above, it stands for wave A of an even bigger A-B-C zigzag. Wave B up and C down have yet to develop before the 5-3 Elliott Wave cycle is complete. In that case, Essex Property can rise to the resistance near $270, before the bears drag it down to ~$160.
However, there is an alternative interpretation of the situation that would sound a lot better to the bulls. Let’s examine it, as well.
It is possible that wave V up has yet to develop. In that case, the pandemic recovery from $176 in March, 2020, to $363 in April, 2022, would be labeled as a simple a-b-c zigzag in the position of wave B of a running flat in wave IV. This would mean the current five-wave plunge to sub-$200 is actually the final wave C of IV. If the market picks this scenario, upside targets above $370 would be plausible.
Unfortunately, running flats are pretty rare so the bulls should not get too optimistic. The good news is that both alternatives point in the same direction in the relatively short run. We’ll have to evaluate the situation again once ESS approaches $270. In our stock portfolio we currently hold 19 stocks we like better than Essex Property.
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