2023-12-12 13:13:46 ET
Summary
- Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF experienced significant gains in 2023 as rates moved lower and sentiment for new home construction improved.
- Home buying slowed in 2023 as interest rates soared, but prices remained high due to low existing home supplies.
- The Dow Jones U.S. Select Home Construction Index reached a record high in 2023, supported by low existing home inventories and pent-up demand.
I concluded a September 9 Seeking Alpha article on the leveraged Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF (NAIL) product with the following:
As the housing market is heading into the 2023/2024 winter, the upward trajectory may slow, and NAIL could experience a significant decline. I favor monitoring NAIL over the coming weeks and months. A downdraft could create a golden buying opportunity for 2024 if the tight housing sector experiences another leg higher as rates stabilize next year. NAIL could be a product that nails some attractive gains in 2024 if the bull market in home prices and new construction continues.
The turbocharged NAIL ETF was at the $71.12 level on September 7. On December 12, it was 23.2% higher at $87.65 as rates moved lower and the sentiment for new home construction and improvements for 2024 improved. Moreover, NAIL has nearly tripled since the end of 2022.
Meanwhile, the ETF that is only appropriate for short-term risk positions experienced a downdraft and fell 43.7% to $40.04 per share from the September 7 level on October 25 as long-term interest rates reached a sixteen-year high.
Home buying slowed in 2023 as interest rates soared
The interest rate on a 30-year fixed-rate conventional U.S. mortgage was below 3% in late 2021. In 2023, when the U.S. bond market fell to a sixteen-year low, home buyers faced financial rates north of 8%.
Twenty-Year Chart of the U.S. Thirty-Year Treasury Bond Futures (Barchart)
The twenty-year chart of the U.S. 30-year Treasury Bond futures shows the drop to 107-04, the lowest level since July 2007.
The U.S. Fed increased the short-term Fed Funds Rate from zero percent in March 2022 to 5.375% in 2023. Moreover, the central bank’s quantitative tightening program to reduce its swollen balance sheet pushed interest rates significantly higher further on the yield curve. Meanwhile, geopolitical tensions reduced Chinese and Japanese demand for U.S. government debt securities, pushing bonds lower and interest rates higher. Rising rates cause home buying to decline and exclude many participants as the higher monthly payments reduce the addressable market. Typically, home prices fall as interest rates rise. However, in 2023, with many homeowners locked into sub-3% mortgages, existing home supplies dried up, keeping prices high. New potential homeowners or those looking for bigger homes to accommodate changing lifestyles face sky-high real estate prices and mortgage rates more than double the level in late 2021.
Home buying slowed in 2023, but prices did not come down all that much while financing costs soared.
A bullish trend in the Dow Jones U.S. Select Home Construction Index
The Dow Jones U.S. Select Home Construction Index reached a record high in 2023.
The Dow Jones U.S. Select Home Construction Index (Marketwatch.com)
The chart dating back to 2009 shows a steady bullish pattern of higher lows and higher highs. While the index corrected in 2022 as the Fed began tightening credit, it came storming back in 2023 despite soaring mortgage rates.
The Dow Jones U.S. Select Home Construction Index (Marketwatch.com)
The one-year chart highlights the correction that took the construction index to lows in October when the U.S. 30-year Treasury bond futures reached a sixteen-year low and mortgage rates rose over the 8% level. However, the rally that began at the October lows took the index to a new record high. The index has followed the bond market since the October low like an obedient puppy and has outperformed the debt markets. Low existing home inventories and pent-up demand have supported the home construction index.
The Fed is likely to pause at the final FOMC meeting- The Fed Funds Rate at 5.375%
The FOMC will announce its final interest rate decision on Wednesday, December 13. Market expectations are for another pause in rate hikes, given inflationary pressure declines over the past months. While the economic condition remains above the central bank’s 2% target rate, it has trended favorably. The short-term rate hikes and quantitative tightening since March 2022 take time to filter through the economy. The Fed faced criticism for waiting too long to address rising inflation after the 2020 pandemic. The central bank is likely cautious to avoid increasing the rate too much and igniting a recession in 2024. Therefore, the central bank will likely pause its rate hikes at 2023’s final FOMC meeting.
U.S. long bond futures have recovered- Mortgage rates slip
After falling to a sixteen-year low in October 2023, the U.S. 30-year Treasury bond futures have recovered.
Three-Year Chart of the Thirty-Year U.S. Treasury Bond Futures (Barchart)
As the chart shows, the long bond reached a 107-04 low in October 2023 and rallied to over the 120 level in December. At above 119 on December 12, the bonds remain near the recent high and in a bullish trend. Higher bonds have pushed mortgage rates lower, which supports increased demand for new home construction. While mortgage rates may have dropped to 7% or lower, they have not done much to loosen up the tight market for existing homes, as those owners continue to pay mortgage rates at 3% or lower. Therefore, new construction must fill the void in a tight housing market.
Meanwhile, as homeowners remain in their houses with low mortgage rates, the demand for home improvements increases, supporting profits in suppliers and companies that sell the necessary products.
NAIL is significantly higher than at the end of 2022- The trend is your friend for 2024, but leverage involves higher risk
The top holdings of the Direxion Homebuilders & Suppliers Bull 3X ETF product are:
The chart shows the over 40% exposure to a leveraged swap reflecting the Dow Jones U.S. Select Home Builders Index. NAIL also has significant exposure to the leading U.S. homebuilding companies and suppliers. The latter includes The Home Depot (HD) and Lowe's Companies (LOW) exposure, incorporating home improvement demand.
At $87.42 per share, NAIL had around $278.9 million in assets under management. NAIL trades an average of 252,754 shares daily and charges a 0.98% management fee.
NAIL is a leveraged product involving elevated risk. When the home construction and supply market suffered, NAIL underperformed the sector on the downside.
The chart shows the 53.9% decline from $86.91 in July 2023 to $40.04 in October 2023 when interest rates peaked. Rates weighed on the sector and crushed the leveraged NAIL ETF.
Meanwhile, as bonds found a bottom, an explosive rally followed, taking NAIL to its most recent $88.25 high on December 11, more than double the level less than two months before on October 25, 2023. Falling interest rates and the prospects for even lower rates in 2024 with a tight existing housing stock have pushed NAIL to a higher high than before the July through October decline.
NAIL’s leverage makes it a trading instead of an investment tool. On September 9, I suggested a downdraft from over the $70 per share level could create a “ golden buying opportunity for 2024 .” The drop to the $40 level was price carnage, and the subsequent rally to a new high under two months late was golden for buyers who nailed juicy profits buying NAIL on the downdraft.
As we head into 2024, the stable rate environment and low stocks of existing homes for sale could continue to push NAIL higher. However, leveraged products like NAIL require time and price stops as a risk-reward plan, and discipline is necessary for profitable results. Please fully understand the risks of trading leveraged investments, including enhanced volatility and drift price erosion, before making any trades.
For further details see:
NAIL: Lower Interest Rates Create An Opportunity