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Can Homebuilders Stocks Claw Back?

May 12, 2022

Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. 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 ETFs are not for you.

Despite being unlikely winners in the post-pandemic stay-at-home economy, homebuilders have been hammered lately, and are struggling to claw back, registering as one of the weakest performing industries year-to-date.

A bit of mean reversion might have been due given the massive post-COVID rally, but with the housing market remaining relatively strong, this downward move might be overdone.

The target index (DJSHMB*) for the Direxion Daily Homebuilders & Supplies Bull 3x Shares (Ticker: NAIL) is down 30.23% year-to-date (as of 4/29/22), compared to a far more modest decline of 13.10% in the S&P 500 index (SPX).

Source: Bloomberg Data.  The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted.

For the most recent month-end and standardized performance click here

While commentators are blaming rising mortgage rates and inflation for housing weakness, homebuilding executives like Stuart Miller, Lennar’s (ticker: LEN) executive chairman say the problem is with supply, not demand:

“While demand is strong, supply is short and constrained, the ability to actually build and deliver homes has been slowed by the supply chain that is all but broken”

The supply chain is still under stress, as you can see by the total manufacturing output index, a key indicator for supply chain health. The supply chain is preventing builders from building new inventory, and hence, sales are down:

Demand, however, remains strong, as we can see by the US metro average of Median Days Pending, which is basically how many days the average house stays on the market:

As of April 11, 2022

So while demand is robust, it seems clear that supply is preventing home sales meeting seasonal expectations, with February and March, the two months that usually pull housing out of the holiday slump, logging two disappointments.

Will Homebuilders Nail it in May?

The data point we’re paying attention to here is Existing Home Sales, released by the National Association of Realtors (NAR). NAR publishes the April data on Thursday, May 19 at 10:00am EST.

But hedge fund manager Harris Kupperman once said, “When it comes to inflection points, if you cannot answer the “why,” you’re just a slave to monthly data.” In other words, you can’t just trade the economic data points, you need to have a variant perspective.

So instead of trying to play the trend following game on home sales data, we’re looking to answer the “why” behind these lagging home sales trends: will the supply chain stress ease up?

Given that markets are forward-looking mechanism, recent price action in homebuilders may tell us everything we need to do about the odds the market is laying for a housing turnaround:

Source: Tradingview.com as of April 25, 2022

Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted.

For the most recent month-end and standardized performance click here

Is a High Rise due for Homebuilders?

It looks like reasonably bearish forecasts are already priced-in to the market, so for any significant price move to occur, home sales would have to significantly surprise to the upside.

Remember, the market moves on surprises. Surprises create volatility because people are positioned with the expectation of a significantly different outcome.

Let’s go over a few potential outcomes and their likelihood to surprise the market:

  • Home sales continue in-line with expectations: no surprise, little volatility
  • Home sales significantly outperform expectations: surprise, potential for high volatility and a short-covering rally
  • Home sales significantly underperform expectations: partly priced in, trend likely to continue downwards with some short-term volatility. The upside price shock in the bullish situation would likely far outweigh that of a bearish price shock, as the market has priced in lagging sales already.

The Direxion Daily Homebuilders & Supplies Bull 3x Shares (Ticker: NAIL) recently broke it’s critical $44 support level and is consolidating near its lows.

Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted.

For the most recent month-end and standardized performance click here

*Dow Jones U.S. Select Home Construction Index (DJSHMBT) 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.

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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, Market Disruption Risk, Aggressive Investment Techniques Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the securities of the Homebuilding Industry, Consumer Good Sector, and Consumer Services Industry. 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.

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