Recap:
The futures market ran $95 higher last week and is now up $165 from its lows. The cash market also had a good week, rallying $55. It is up almost $90 from its lows. While the previous week’s rally was mostly fund buying this week was very well rounded. My thoughts of a tight ranged slog are out the window. The industry is settling into the thick of the economic issue and finding that it isn’t that bad. Many had to enter the cash market sooner than expected to lock in jobs. The market would typically digest after a sharp move, but what we saw in futures on Friday may prevent that. There were two 100 lots bid within a dollar bid. That raises numerous issues and red flags.
Economics:
The completion chart I showed last week indicates a topping housing market. Most would agree that home building has slowed, but would also agree that the rapid pace of construction was not sustainable. The economy as a whole will spend the rest of the year bouncing from sector to sector with bad news. This type of economic cycle will lower home prices and pressure interest rates. That’s a plus for our industry. With a better outlook, less Euro wood and Canadian production we can see the lumber market finding some type of balance. Add in a China opening, and the US supply and demand curve is closer to equilibrium. I can’t stress enough the fact that any indication of an over bought or oversold market equates to a big move today. This market is no longer conditioned to move $70 on news. It’s conditioned to move $300 or more. The reason being is all the consolidation the industry has gone through over the last 20 years.
Technical:
The focus last week was on the looming gap below the market. Today it is still the focus but this time with a positive spin. The gap was created by an expiration and not better business. (At least I thought) Today that gap is still in place and has created a very supportive trend line. It comes in at $397.70. It’s not often we see a pattern reversed from negative to positive on a long-term chart in just one week. That’s what happened here. The long-term pattern is now showing a possible V bottom. The issue today is the short-term pattern. With an RSI of 88% and the slow stochastics turning down there should be some type of correction coming. A $50 pullback would not influence the cash trade. It will be a technical correction in futures. Basis traders need to be aware of this possibility to liquidate the trade.
Note:
If you created a simple math equation in 2000 for the breakeven price of lumber by 2020 it would come out to be roughly $380. Now add the fact that from 09 to 11 the industry did not build enough to offset teardowns and you get closer to $420. Add covid logistic nightmares and the number is higher.
Summary:
The market broke out a month earlier than the industry wanted. The higher wages are going to allow buyers back into the market. As I said before, inventory is an investment not a liability. Buy it. You can always sell the futures if you don’t like it.
NEW CONTRACT:
Lumber Futures Volume & Open Interest
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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