When under pressure, athletes need to have nerves of steel to outlast, outwit, and outplay their opponent(s). In an epic Wimbledon final (the biggest event in tennis), Roger Federer beat Andy Roddick 16:14 in the fifth and final set (the the longest 5th set ever played).

With a brief lapse of concentration, Andy Roddick denied himself the biggest win of his career and handed Roger Federer his record breaking, 15th Grand Slam title.

Yes, extraordinary events require extraordinary decisions and the ability to execute. Decisions need to be based on solid knowledge. Knowledge you can trust to be accurate and worthy to act upon.

Extraordinary events require extraordinary decisions

As investors, we had the doubtful privilege of witnessing some of the most extraordinary events seen in decades. First, we saw the dot.com bubble drive the Nasdaq (Nasdaq: ^IXIC) to all-time highs. A few years later, we saw the real estate (NYSEArca: IYR) boom mature then bust. In 2007 we witnessed the all-time highs for the S&P 500 (SNP: ^GSPC) and Dow Jones ((DJI: ^DJI). Last year commodities topped.

For those who didn’t sell before the bubble burst, the recent rally presents an opportunity to sell at respectable prices. The question is whether selling at current prices is smart or short-sighted.

One way or another it’s crunch time for investors. The markets are testing your nerves (hopefully made of steel) and the capability to outwit the machinations of the stock and real estate markets.

Is the recent spike in real estate prices an indication that the worst is over, or merely a decoy rally followed by more pain ahead?

The Good, the Bad and the Ugly

News surrounding the real estate sector has been encouraging, as of late. Real estate prices have either started to go up or declined at a slower pace.

This moved Robert Shiller, co-creator of the S&P/Case Shiller Home Price Index and Yale University economist, to predict the following in a recent interview with Bloomberg: “At this point, people are thinking the fall is over. The market is predicting the declines are over.” Is it really?

On January 15th, the last time investors talked about a bottom in the real estate market, the ETF Profit Strategy Newsletter encouraged investors to do the following: “Before talking about a housing bottom, we have to analyze what caused the housing bubble and the subsequent burst of the bubble. If you were about to bet on a losing team, you'd make sure that the problems causing the losing streak were fixed before putting down your bet, right?”

What caused the “losing streak” for real estate?

Here’s the short answer to a complex question: Falling prices and rising unemployment ganged up to cause record mortgage delinquencies and failing financial institutions. In other words; easy money and the desire to buy and own real estate caused prices to reach unreasonable realms. Conversely, constricting credit and the willingness to sell, caused prices to come down. Both problems (tight money and the willingness to sell) would have to be fixed in order to set the stage for a sustainable increase in prices.

Have those problems been solved? Judge for yourself.

Sales of existing homes posted gains in April and May, while housing starts jumped in May from a record low. Unemployment numbers continue to rise, albeit at a slower pace.

Most real estate or REIT ETFs, such as the Vanguard REIT ETF (NYSEArca: VNQ), SPDR Dow Jones REIT ETF (NYSEArca: RWR), iShares Cohen & Steer Realty Majors (NYSEArca: ICF), and even SPDR Dow Jones Global REIT ETF (NYSEArca: RWX) have rallied as much as 60% from their March lows.

If you are searching for “green shoots,” those numbers could be interpreted as such. Keep in mind, however, that despite rising prices, the year-over-year numbers for the S&P Case/Shiller Index still show an 18.1% loss. This is better than March’s 18.7% loss, but no real improvement.

Before you jump on the rally bandwagon, ask yourself this; have the sources claiming that a market bottom has occurred proven to have a “green thumb” when it comes to predicting green shoots, or anything else market related?

Wall Street and the financial media were cheerleading banks and the entire financial sector (NYSEArca: XLF) all throughout the 2008 meltdown. By the time Wall Street adopted a doomsday attitude, stocks bottomed (March 2009) and rallied relentlessly. Chances are your portfolio would be in better shape if you hadn’t listened to Wall Street’s opinions about real estate and stocks.

The Change that Matters

The REAL development over the past few months has been an improvement in investor perception. A strategist and economist fittingly describe Bernanke’s “green shoot” references as “A comment on the human condition and the innate need for optimism.”

The ETF Profit Strategy Newsletter’s March 2nd Trend Change Alert references this need for optimism and its implications, as follows: “This counter trend rally will have to be broad and powerful in order to relieve investor's pent-up up urge to buy. Nevertheless, keep in mind this will be a counter trend rally, the down trend will resume once the rally exhausts itself. This point of exhaustion is likely to happen at a point where optimism takes over and investors think that the Q1 2009 lows are here to stay.”

In January, the newsletter expected a drop in real estate prices followed by a powerful rally. Following is the newsletter’s detailed advice of that time: “A bottom in real estate seems far away. The only ETF that benefits from falling real estate prices is the ProShares UltraShort Real Estate (NYSEArca: SRS). SRS at times performs erratically. Nevertheless, unless you short one of the ETFs listed on page 3, SRS is the best option to benefit from a declining housing market. Similar to U.S. stocks, real estate prices should recover temporarily. Buy SRS below $65 and sell after 40-60% gains.”

SRS spiked as high as $111 on March 6th (the day the stock market bottomed) and delivered the 40-60% gain mentioned, before tumbling to $18 and below.

Co-Dependent Markets make Forecasting Easy

A picture paints a thousand words, and the chart below, which plots the S&P 500 (NYSEArca: SPY) against the iShares DJ US Real Estate Index (NYSEArca: IYR), shows that stock and real estate prices have been moving in sync and will continue to do so. Why? Because we are in a deflationary environment in which nearly all asset classes lose value.

A forward looking analysis of real estate data confirms the future outlook of stocks (down) and a forward looking analysis of stock market indicators confirms the future outlook of real estate (down). Both markets are intertwined, just as falling leaves and autumn go together.

This may sound absurd, considering that real estate ETFs have rallied as much as 60% in 90 days. Consider this: Borrowers with good credit now make up the largest share of foreclosures, while sub-prime borrowers continue to struggle.

Stock prices have rallied (as mentioned in the above Trend Change Alert) to relieve investors pent-up urge to buy. As this urge subsides, the markets’ down trend will continue.

This is confirmed by the Dow Jones (NYSEArca: DIA) measured in the only true currency, gold (NYSEArca: GLD). Already, the gold-Dow has declined much further than the inflated dollar denominated Dow. Eventually, the dollar-Dow will catch up with the gold-Dow. This point is not far away.

The March and June ETF Profit Strategy Newsletters contained a detailed analysis of the gold-Dow along with four other indicators, we call the “Four Horsemen.”  These indicators have a history of accurately forecasting major market bottoms.

Athletes strengthen their nerves and ability to execute tough decisions through rigorous training. Investors increase their ability to protect and grow their wealth through mental exercises, resulting in knowledge. How will your investments fare when it’s time to make the tough decisions?