The Leonard Lumber Report: The feature of the week was easily the $122 swing this past Monday

Change for the Week:
May Futures 889.00 -$60.90
Open Interest 2782 +15
CoT + 245 Industry -143 Long Funds

The feature of the week was easily the $122 swing on Monday. May went from $40 higher to $80 lower in a matter of minutes. The feature may be more about how it was received than the distance, and it was met with a lot of yawns. What is noticeable is the collective sigh of relief from the whole industry on limit-down moves in futures. People need wood again. Looking at the commitment of the trader’s report, there is a continuing gain in the industry longs. These are forward buys in futures at the discount. They keep stacking up, keeping the cash side slow, and that will turn into business at some point. I would look for that to slow now that cash is close to futures. Any push in that market will cause a futures rally as short hedges cover. That is how the futures swing from a discount to a premium and bottoms cash. 

While we expect the froth starts to come off the housing market, it won’t happen tomorrow. The market has slowed enough to allow the wood to ship in real-time, and it has not solved the logistics issue. We saw back in February reports of the rail sector staying tied up through the summer. Reports over the weekend of nitrogen producers seeing their car allotment shrink have turned the ag community on its head. Planting and growing seasons could see a shortage of fertilizer. If the rail side limits cars to that sector, we can’t see them freeing up more to the lumber side. That will be a factor in our market if the buyers hold out too long. 

Let’s Get Technical: 

The focus here is on a bottoming formation. There is a little-known gap in May from 825.00 to 809.00 set on December 1st. May hit $829.30 last week, putting the gap in play. Also, the bottom of the channel comes in at 795.00. If you are getting long, you can use $829 as your stop area. There’s no reason to wait around for $795. On the flip side, we don’t see a value in shorting the market on a rally. A close over $900 and a loss of the algo will send this thing $100 higher overnight. 

Outlook: 

Repeat… We’ve seen this drill before. One day the mills can’t give wood away, and then they are off the market. We hate to say it, but it is going to happen again. The longer this one takes to catch, the less the worthy the “sell in May and go away” will be. We see that $1000 wood could now be the new $1400. The mills should start to sell rallies in futures. 

The trade locked in their second-quarter needs around $1400. Today the fight is at the $1100 mark and getting a lot of pushback. The point is a trading level of $1100. If that is the case, then futures are getting cheap. Cash was quoted at $1030 on Friday with no takers. We recommend staying out of the riptide Mondays in futures and waiting for a better read on Tuesday….

Open Interest and Commitment of Traders:

https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf

https://www.cftc.gov/dea/futures/other_lf.htm

About The Leonard Report

The Leonard Lumber Report is a new column that focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.

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