THE LEONARD LUMBER REPORT: The open interest in fund shorts dropped almost 30% for the week

Commentary: 

The open interest in fund shorts dropped almost 30% for the week. That answers where the robust buying in March came from. It also shows that the funds are outright liquidating. They did abruptly stop buying as of Wednesday dulling the futures trade. Without the fund buying the futures premium to cash comes into focus. I’ll talk about the chart formation when I write the technical piece, but I would suspect a sloppy week is coming.

Economic:

The positives of the housing industry need to be mentioned often to reenforce the potentials. The chart below is of housing completions since 1968. It shows a modest uptrend for the last 8 years. A mild pullback in construction will smooth out the covid spike but also keep the trend in place. Housing isn’t dead. It just got ahead of itself. The chatter out there is that if rates were 6% 8 years ago and wages were rising at today’s pace demand would have stayed the same. That’s interesting. Today it is all about affordability. The market priced the buyer out of the game. We now have to wait for convergence. Existing homes are down $50K since June. Rates are down to 6.15%. There is still a way to go, but it is going in the right direction.

Technical: 

That’s one hell of a gap below the market. This upcycle has extended most of the momentum indicators enough to warrant a correction. Those two factors indicate a pullback is coming. The question is how much? As far as futures go any selloff is met with good support. The futures quickly become oversold whereas the overbought side takes time. I’m sticking with the current range projection of $392 to $456 with $411 now representing a pivot area.

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

About the Leonard Report:

The Leonard Lumber Report is a 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.

Brian Leonard

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312-761-2636