Market Overview

Healthy Outlook, Fed Help Support Hitting The NAIL

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There's no getting around the fact that homebuilders and housing-related assets proved vulnerable during the March market swoon induced by the coronavirus pandemic.

What Happened

At the height of the first wave of COVID-19 cases, the Dow Jones U.S. Select Home Construction Index plunged, but with some help from the Federal Reserve, the recession experienced by the U.S. economy isn't nearly as bad as the global financial crisis.

That's music to the ears of adventurous traders backing the Direxion Daily Homebuilders & Supplies Bull 3X Shares (NYSE: NAIL). NAIL, the king of leveraged homebuilders exchange traded funds, looks to deliver triple the daily returns of the aforementioned Dow Jones U.S. Select Home Construction Index.

Predictably, NAIL was hammered March, tumbling from a flirtation with $99 to below $5. However, the leveraged homebuilders ETF is getting its groove back. After surging 8.43% on Wednesday, NAIL is higher by more than 80% over the past 90 days.

Why It's Important

Through purchases of mortgage-backed securities (MBS) and historically low interest rates, the Fed propped up the housing market, paving the way of NAIL's rebound.

“Learning from 2008/09, the Fed quickly resumed MBS purchases in March 2020. These MBS purchases were designed to prevent a collapse in mortgage finance and self-feeding spiral of loan defaults, repossessions, negative equity and lower prices,” according to FTSE Russell research. “Although the spread between 10-year yields and mortgage rates has widened sharply, outright mortgage rates are at historic lows. Refinancings have also recovered quickly, despite the COVID-19 restrictions.”

Apparently, traders like what they're seeing in terms of homebuilders catalysts because year-to-date inflows to NAIL tally nearly $81 million.

What's Next

Beyond the Fed backstop, there are other near-term catalysts for NAIL, including a still robust prime borrower market and the fact the current economic malaise doesn't compare well with the global financial crisis.

“For prime borrowers, there is little evidence of a housing crisis, despite the surge in unemployment. Loan forbearance schemes and a foreclosure moratorium have temporarily alleviated significant distress for many borrowers,” note FTSE Russell. “A robust housing market in the years since 2009, and steady house price gains mean prime borrowers generally have good equity buffers at current house prices. Lower building permits in the decade since the GFC also mean the over-build of housing supply, which occurred in the run-up to the GFC, is less evident today, reducing downward pressure on house prices.”

 

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