Category: Education

The Lumber Market:

The futures market continued to rally last week. This time, the driver was the fund liquidating shorts. Two weeks ago, it was a substantial cash trade. Last week, it was the roll and liquidation. The cash trade was good last week, but the futures trade was all fund related. On Friday, a mill went off the market, which resulted in nary a ripple in futures. At this point, we need a third catalyst to help the market higher.

Factors to watch:

• A slowing Euro supply

• Quota information (If the producers get the funds back as usual, this is only a forced savings account and should not be added to the final cost.)

• I’m not sure, but I think we went through a day or two without the President calling out lumber. At some point, you will have too much wood or not enough. Those with too much wood can hedge at a premium and wait it out. Those who do not have enough should go back to the old-fashioned way of buying deeply discounted items and running with those until the smoke clears.

• Spring… misery loves company, so any consistent warm weather will wake the stragglers up. ( This is not a market factor. Anytime we went into spring bullish, we would find the wood was already bought and delivered.)

Technical:

The market broke out to the upside of the wedge, which measures $648. I am still in the camp where the market is headed. The issue developing is that this week’s trade shows up on the charts as a big negative. Lumber historically doesn’t creep higher and then explode up. It tends to trade sharply lower for a day or two. Fund liquidation won’t get the market to $648. Adding new shorts will.

If the market sentiment, which is about 95% bullish, can turn down, some higher levels will be hit.

Recap:

” A flare for the dramatics.” That’s how the market was described last week. It was meant for futures but can be easily fit the cash trade most of the year. Here all in or all out mentality drives prices more than supply and demand. The fact that this commodity has been in a range now for over 2 years, but the trade can get chopped up, shows us just how difficult this market is to navigate. At the end of the day, the price always represents value. The main takeaway from last week was that this market is working to redefine the trading range higher. If you look back over the past few weeks, many cash items were back near their lows. That’s not a consolidation higher, but it’s not a confirmation of value. The futures market better defines the overall market as it is a broader indicator of prices and attitudes. Last week we saw a rally of about $40. Yes, it was all in one day and actually all in a matter of minutes, but the fact that it didn’t give it all back tells us that the value area is higher. If all economics remain the same the market has suggested the new value area to be $560 up from $520. The buy zone has moved up. The sell is the premium offered when out of line.

Technical:

It’s hard to find a mirror today’s chart pattern in any markets. The looming gap down to $540 will keep most technicians out of the market. The idea mentioned above of a new value area and how this market trades technically are opposites this week.

The roll has allowed a long algo to trade again. That will be the key to direction this week. That said, with rising open interest in the commercial longs and in the fund shorts, I’m worried more about the downside more than the upside during the holidays. Again, the roll will bring in buying. The best trade of the week is to shut off the computer and come back on January 6th.

Recap:

It was a very healthy week for both cash and futures. As a combination, it was the best week for price movement all year. The key was the market went higher on its own. There was no outside noise to push it. It was all demand driven. That leads us to three simple scenarios. The first is that the market is still underbought and will stay tight. This could be the case as the “off the market” mill is back in the game. A slow buy could drag the market higher since we’ve had a few years for the buy side to be engrained with less is more. The next scenario is that the market is searching for a new trading level, which would be higher. Futures may pull back and wait for cash but shouldn’t break sharply. Maybe good selloffs followed by rallies. Finally, the typical futures trade. Here, futures drop at least 61% back, often in a quick second.

My first thought is that the reduction in production is noticeable when demand picks up and then fades into the background as the market slows. We have a good handle on the industry’s inventory capacity. Without a logistics issue, capacity will always put a top in the market. Today’s question is whether we should remain confident in the numbers when supply is limited. The trade is content to stay the course. No one has seen any demand creep yet. This run is only a shot over the bow.

A critical factor in this industry is interest rates. Most haven’t noticed, but since the Fed cut on September 18^th, the 30-year mortgage rate has risen by 80 bps. Going into 2025, the builders will negotiate the marketplace at a 6 to 7% rate. The Fed is looking for a 3.5 to 4% nominal rate, up from 2%. That will keep the 30-year locked above 6%. I go back to my “check the boxes” strategy. The multifamily guys will find a way to make the higher rates work. There is a ton of money in this sector that likes condos and apartments. They don’t like to “divest”. They value this sector. Our multifamily guys should look for an uptick next year in bidding. I’m not sure SYP isn’t already signaling things are getting better there.

Again, this is a multifaceted industry. The financial drivers go well beyond the mills and distributors.

Technical:

Jan had a $41 run from last Friday’s lows to the highs this week. That’s big. The stochastics were the first indicator of a possible rally. The other oscillators followed. Last week, I commented that the outside spec trade would see lumber as a buy. I’m not sure how much they participated, but we saw a big push through a small hole. Coming into this week, the signal is to sell. With a January RSI of 82.77% and a lag to the rally, they will see weakness and room to the downside. My point is that the futures market is overbought. The cash market isn’t.

Daily Bulletin:

Recap:

This has turned into a strong upcycle in the cash and futures markets. I thought the market would correct after 23 days up and a very weak starts report, but it didn’t. The long lag between buys left many short cash. Yes, those holes are filled, but the wood is also going out the door. The buy-side hasn’t formed its rhythm yet. The rail issue isn’t helping the equation, as everyone knows it won’t be a factor until it is. The market has spent a few years in this area. The reluctance to participate at value is confusing.

Let’s take a look at the 2023 and 2024 cycles. In 23, the market traded flat, but with a good takeaway. It started near its lows and drifted marginally higher by year-end. In 2024 it was
“load the boat” coming into the year only to see the pace of outtake slowing. Today, we are seeing that pace pick up, similar to 2023. If the pace stays steady, there is a chance for a continued drag higher.

Technical:

The elephant in the room is the obvious. September futures are up $82 from their lows four weeks ago and $119 from July’s settlement. The fundamental question is whether Sept has returned to normal or is $40 too expensive. The technical question is whether Sept is overbought. On the fundamental side, the creep higher in the cash market keeps the higher futures levels in check. A good correction in futures could put them at a discount?? The technical picture is somewhat confusing up here. It lacks the momentum to go higher but will not enter into the overbought condition. There is more room for the upside. The issue with a pullback is this lack of momentum could stall the market out. Scale-up hedging is still the strategy. This type of market stops on a dime giving you little chance to hedge. If you wait till 560 or 580 you may miss it.