Here’s who benefits
Why are we talking about interest rates, home builders, and construction?
Because it’s a gift that keeps on giving! This is a major theme that’s dominated our trading and my portfolio beginning in Q3 of last year. It continues to be a trade, theme, and trend that we can rely on. (Perfect for counting down, right?)
But why can we continue to rely on these…?
STEP ONE: Rates, Home Builders, and Construction
Our ‘BIG IDEA’ for today
Before we dive into this ‘big idea’, it’s important to go back just a little bit to the previous Federal Open Market Committee (FOMC) decision.
We’re going back to June, and if you remember (and you probably saw the move), we saw home builders get hit pretty hard as the market really wasn’t sure just how accommodative the FOMC was going to be in June.
Ultimately, they set up the high expectations that we’re seeing for the July 31 decision on rates. This decision’s already highly anticipated to be a 25 basis point, or quarter point, cut. With this, you’ll notice as the market moves closer and closer to this end of July decision…
Support in bonds and also support in ETFs (like ITB and XHB) will continue to deliver.
STEP TWO: Mortgages and Bonds (specifically the long bond, short yield)
Our Specific Event within our ‘BIG IDEA’
Now why is this?
Think about any time traders aren’t certain about the direction of rates.
In this case as it continues to go down, you’re going to see home construction ETFs (like ITB) get hit. Even home builder ETFs (like XHB), again, will get hit.
What does this mean for us in the markets?
There are a number of particular stocks that are going to be affected. If I’m long bonds, I want to stay long ITB and XHB on pullbacks. And as I’ve said, I’ve been long bonds for several quarters now.
What do bonds have to do with mortgage rates?
Mortgages have higher risk than bonds (many of you may already know that). So naturally, when we look at where yield might be sought, that’ll be a conversation that includes rates and real estate — which is a place the market gets pulled. Here’s the other thing to keep in mind…
As the interest rate on the US Treasury Note drops, banks have to drop rates on their new mortgages. The inverse also applies. That’s why we see that very sympathetic movement.
In the video below, I’ve included some key images that help depict this well.
STEP THREE: DHI, NVR, HD, XLU, REITs (and more)
Possible Trade Setups
If we know that mortgages are about to drop… what are the stocks and the broader ETFs that are going to benefit from this?
Watch the video below for those:
As long as you understand the timing that the bonds give us to these broader ETFs (mentioned in the video) and their individual stocks, you can set up trades — not only in your portfolio for longer term — but you could also set up shorter term trades.
Home Depot is a great example.