Editor’s note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.
Markets have a way of surprising people. Take the performance of homebuilder stocks. The Federal Reserve has been on a rate-hiking tear, we’ve experienced something of a banking crisis, and investors are preoccupied with the risk of a recession. You would think these three factors would send the shares of anything housing-related spiralling downward. But you’d be wrong (so far, at least). The Dow Jones Select U.S. Home Construction Index* is up 12% year-to-date. This index comprises major homebuilders as well as some companies that provide materials to the construction industry.
Source: www.stockcharts.com, April 10, 2023.
When stocks don’t go down on bad news, that’s often a sign of good things to come. So, can homebuilders put in a roof-blowing rally?
The Spring Buying Season Looms Large …
When it comes to housing, spring often sets the tone for the rest of the year. Prospective buyers who hibernated in the winter emerge to consider their options and the homebuilding industry holds its collective breath. Expectations are somewhat subdued this year. New home sales in February fell 17% year-over-year, as potential purchasers were sidelined by rising rates. Traders should keep an eye on data for March, which is set to be released on April 25. An upside surprise could be a tailwind for homebuilder stocks, while a disappointing print could lead to a selloff.
… And So Do Interest Rates
No talk of the homebuilding industry is complete without looking at interest rates. Rates have a massive impact on affordability and big swings in rates can price in (or out) a lot of people from buying a new home.
For those looking for a mortgage, the last year has been brutal. The benchmark 30-year fixed mortgage rate was around 4.7% last April. Today it sits at above 6%. That’s the bad news. The good news is that rates peaked at over 7% in the fall so we’re starting to see meaningful help for homebuyers.
The direction of rates will be heavily influenced by core inflation numbers, as well as the actions of the Fed. On those notes, traders may want to monitor the next Consumer Price Index report (May 10) as well as the next FOMC meeting (decision to be released on May 3). On the inflation front, homebuilder bulls want to see a continued decline in Core CPI. And with the Fed, bulls will be crossing their fingers for more signs that the central bank is nearly done with its rate hike campaign.
Zooming In: Can the Shares Hold Key Moving Averages?
Virtually every trader watches short-term moving averages for hints that trends are continuing or about to reverse. With the homebuilder stocks, it’s noteworthy that many are trading right at their 50-day moving average. Take industry heavyweight D.R. Horton (DHI). In recent weeks the stock has threatened to break below the 50-day average but so far repelled all attempts. As of March 31, 2023, DHI was 15.04% of the holdings of the Dow Jones Select U.S. Home Construction Index.
Source: www.stockcharts.com, April 10, 2023.
How Bulls Can Play a Rally
Traders bullish on the homebuilding sector can seek to turbocharge any gains with the Direxion Daily Homebuilders and Supplies Bull 3X Shares (NAIL). This ETF seeks daily investment results, before fees and expenses, of 300% of the performance of the Dow Jones U.S. Select Home Construction Index.
*Definitions
The Dow Jones U.S. Select Home Construction Index measures U.S companies in the home construction sector that provide a wide range of products and services related to homebuilding, including home construction and producers, sellers and suppliers of building materials, furnishings and fixtures and also home improvement retailers. The Index may include large-, mid- or small-capitalization companies. One cannot directly invest in an Index.
Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
The Dow Jones U.S. Select Home Construction Index is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty Asset Management, LLC (“Rafferty”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Dow Jones U.S. Select Home Construction Index. One cannot invest directly in an index.
Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and include risks associated with the Fund concentrating its investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause its price to fluctuate over time. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to the securities of the Homebuilding Industry and Industrials and Consumer Discretionary Sectors. The homebuilding industry includes home builders (including manufacturers of mobile and prefabricated homes), as well as producers, sellers and suppliers of building materials, furnishings and fixtures. Companies within the industry may be significantly affected by the national, regional and local real estate markets, changes in government spending, zoning laws, interest rates and commodity prices. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.