Feverpitched
I concluded a September 9 Searching for Alpha article on the leveraged Direxion Day by day Homebuilders & Provides Bull 3X Shares ETF (NYSEARCA:NAIL) product with the next:
Because the housing market is heading into the 2023/2024 winter, the upward trajectory might gradual, and NAIL may expertise a big decline. I favor monitoring NAIL over the approaching weeks and months. A downdraft may create a golden shopping for alternative for 2024 if the tight housing sector experiences one other leg larger as charges stabilize subsequent yr. NAIL might be a product that nails some engaging beneficial properties in 2024 if the bull market in residence costs and new development continues.
The turbocharged NAIL ETF was on the $71.12 stage on September 7. On December 12, it was 23.2% larger at $87.65 as charges moved decrease and the sentiment for brand new residence development and enhancements for 2024 improved. Furthermore, NAIL has almost tripled for the reason that finish of 2022.
In the meantime, the ETF that’s solely applicable for short-term threat positions skilled a downdraft and fell 43.7% to $40.04 per share from the September 7 stage on October 25 as long-term rates of interest reached a sixteen-year excessive.
Dwelling shopping for slowed in 2023 as rates of interest soared
The rate of interest on a 30-year fixed-rate standard U.S. mortgage was beneath 3% in late 2021. In 2023, when the U.S. bond market fell to a sixteen-year low, residence patrons confronted monetary charges north of 8%.
Twenty-12 months Chart of the U.S. Thirty-12 months Treasury Bond Futures (Barchart)
The twenty-year chart of the U.S. 30-year Treasury Bond futures reveals the drop to 107-04, the bottom stage since July 2007.
The U.S. Fed elevated the short-term Fed Funds Price from zero % in March 2022 to five.375% in 2023. Furthermore, the central financial institution’s quantitative tightening program to cut back its swollen steadiness sheet pushed rates of interest considerably larger additional on the yield curve. In the meantime, geopolitical tensions diminished Chinese language and Japanese demand for U.S. authorities debt securities, pushing bonds decrease and rates of interest larger. Rising charges trigger residence shopping for to say no and exclude many individuals as the upper month-to-month funds scale back the addressable market. Usually, residence costs fall as rates of interest rise. Nevertheless, in 2023, with many householders locked into sub-3% mortgages, present residence provides dried up, retaining costs excessive. New potential householders or these on the lookout for larger houses to accommodate altering existence face sky-high actual property costs and mortgage charges greater than double the extent in late 2021.
Dwelling shopping for slowed in 2023, however costs didn’t come down all that a lot whereas financing prices soared.
A bullish pattern within the Dow Jones U.S. Choose Dwelling Development Index
The Dow Jones U.S. Choose Dwelling Development Index reached a document excessive in 2023.
The Dow Jones U.S. Choose Dwelling Development Index (Marketwatch.com)
The chart courting again to 2009 reveals a gradual bullish sample of upper lows and better highs. Whereas the index corrected in 2022 because the Fed started tightening credit score, it got here storming again in 2023 regardless of hovering mortgage charges.
The Dow Jones U.S. Choose Dwelling Development Index (Marketwatch.com)
The one-year chart highlights the correction that took the development index to lows in October when the U.S. 30-year Treasury bond futures reached a sixteen-year low and mortgage charges rose over the 8% stage. Nevertheless, the rally that started on the October lows took the index to a brand new document excessive. The index has adopted the bond market for the reason that October low like an obedient pet and has outperformed the debt markets. Low present residence inventories and pent-up demand have supported the house development index.
The Fed is more likely to pause on the ultimate FOMC meeting- The Fed Funds Price at 5.375%
The FOMC will announce its ultimate rate of interest choice on Wednesday, December 13. Market expectations are for one more pause in charge hikes, given inflationary strain declines over the previous months. Whereas the financial situation stays above the central financial institution’s 2% goal charge, it has trended favorably. The short-term charge hikes and quantitative tightening since March 2022 take time to filter by way of the economic system. The Fed confronted criticism for ready too lengthy to deal with rising inflation after the 2020 pandemic. The central financial institution is probably going cautious to keep away from rising the speed an excessive amount of and igniting a recession in 2024. Subsequently, the central financial institution will seemingly pause its charge hikes at 2023’s ultimate FOMC assembly.
U.S. lengthy bond futures have recovered- Mortgage charges slip
After falling to a sixteen-year low in October 2023, the U.S. 30-year Treasury bond futures have recovered.
Three-12 months Chart of the Thirty-12 months U.S. Treasury Bond Futures (Barchart)
Because the chart reveals, the lengthy bond reached a 107-04 low in October 2023 and rallied to over the 120 stage in December. At above 119 on December 12, the bonds stay close to the latest excessive and in a bullish pattern. Increased bonds have pushed mortgage charges decrease, which helps elevated demand for brand new residence development. Whereas mortgage charges might have dropped to 7% or decrease, they haven’t completed a lot to loosen up the tight marketplace for present houses, as these house owners proceed to pay mortgage charges at 3% or decrease. Subsequently, new development should fill the void in a decent housing market.
In the meantime, as householders stay of their homes with low mortgage charges, the demand for residence enhancements will increase, supporting income in suppliers and corporations that promote the required merchandise.
NAIL is considerably larger than on the finish of 2022- The pattern is your good friend for 2024, however leverage entails larger threat
The highest holdings of the Direxion Homebuilders & Suppliers Bull 3X ETF product are:
Prime Holdings of the NAIL ETF Product (Searching for Alpha)
The chart reveals the over 40% publicity to a leveraged swap reflecting the Dow Jones U.S. Choose Dwelling Builders Index. NAIL additionally has vital publicity to the main U.S. homebuilding firms and suppliers. The latter contains The Dwelling Depot (HD) and Lowe’s Firms (LOW) publicity, incorporating residence enchancment demand.
At $87.42 per share, NAIL had round $278.9 million in property underneath administration. NAIL trades a median of 252,754 shares every day and expenses a 0.98% administration charge.
NAIL is a leveraged product involving elevated threat. When the house development and provide market suffered, NAIL underperformed the sector on the draw back.
Chart of the NAIL ETF Product (Barchart)
The chart reveals the 53.9% decline from $86.91 in July 2023 to $40.04 in October 2023 when rates of interest peaked. Charges weighed on the sector and crushed the leveraged NAIL ETF.
In the meantime, as bonds discovered a backside, an explosive rally adopted, taking NAIL to its most up-to-date $88.25 excessive on December 11, greater than double the extent lower than two months earlier than on October 25, 2023. Falling rates of interest and the prospects for even decrease charges in 2024 with a decent present housing inventory have pushed NAIL to the next excessive than earlier than the July by way of October decline.
NAIL’s leverage makes it a buying and selling as a substitute of an funding device. On September 9, I recommended a downdraft from over the $70 per share stage may create a “golden shopping for alternative for 2024.” The drop to the $40 stage was value carnage, and the next rally to a brand new excessive underneath two months late was golden for patrons who nailed juicy income shopping for NAIL on the downdraft.
As we head into 2024, the steady charge surroundings and low shares of present houses on the market may proceed to push NAIL larger. Nevertheless, leveraged merchandise like NAIL require time and value stops as a risk-reward plan, and self-discipline is critical for worthwhile outcomes. Please absolutely understand the risks of buying and selling leveraged investments, together with enhanced volatility and drift value erosion, earlier than making any trades.