Category: Hedging

Recap:

Light at the end of the tunnel. After 14 sessions in the same range, the bleeding may have slowed for now. The longer the market goes without a buy, the closer it gets to one. This year, each buy was triggered by some type of announcement. For the remainder, the buy side picked off deals. Last week, January futures were only down $4.50 after experiencing a $27.50 range for the week. During that period, open interest increased to 10,500. Interestingly, the CFTC report is gradually catching up, showing a rise in fund shorts on October 28. My belief all along is that the funds are holding many more shorts on this one than in most past years. This indicates that the funds are aggressive on the downside and will roll, staying short. They have been correct for several years. That roll should become evident soon, especially as the holidays shorten trading this month. Low volume could lead to rallies off the roll.

This year, the market never had a sustained rally. So why is that? Why has the marketplace held sufficient inventories all year long? We are underbuilt, correct? Supply is getting reduced monthly, and demand remains steady. That has led to spikes, followed by selloffs of a greater magnitude. The market is acting as if the normal factors leading the market are changing. I have touched upon “outside factors,” maybe generating a different-looking housing market. I like the term “great reset.” It isn’t a new development in the industry but rather a reset or return to a former norm. So, what is the new norm? Extremely low rates allowed many to buy up relative to their earnings. Then you had COVID, which chased many, including me, to a safer environment. Today, it appears more like the older market, where the buyer’s reasoning or budget doesn’t prompt them to move. Have the newer factors changed, dynamics? Or maybe resetting. If true, the market will see A. more inventories show up as rates lower. Those sellers are not necessarily buyers of new homes under these circumstances. The buyers will start to see a normal 3-5% return on their homes, slowing their ability to trade up. And finally, more families will be choosing a forever home and not the “next step up” home.

There is a real demand issue in our market. Less supply will help prices, but the overall business is down and just may stay there. We have the BBB coming on Jan 1 to help some, but there could just be a shift in buying a home back to the norm.

Technical:

Last week’s points were 554.20, 556.70, and 562.50. Those are still in play. The chart pattern is a bottoming formation. The roll and year-end could help create a buy push. This has been a year of scaled-in selling. Always being early has been a good thing. It looks as if the $70 basis could now be a $50 basis. Again, reverting back to the norm…. It has been about 2 months since the market pushed through the 13-day EMA. It sits at 544.40. Last Thursday’s spike traded through it but then closed lower. Let’s see if the January futures will test it this week.

Daily Bulletin:

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

Southern Yellow Pine:

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/southern-yellow-pine.volume.html

The Commitment of Traders:

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

Recap:

This market remains challenging. Last week, futures hit new lows almost every day, with all focus on the daily EFP deals. Most of the cash trades occurred at one mill, forcing the others to work hard to find value. This type of trade signals a bear market that is likely to continue. Throughout the year, the market has rallied because of the duties and tariffs, but without an increase in demand. Supply is tightening, but not at a pace to boost prices. We are waiting for signs of that scarcity. While we wait, there’s a large gap between the November expiration price and the January contract. These gaps are filled, but recent history shows it usually happens near expiration. The market typically gets a relief bounce before setting the lows. The issue today is the timing. We’re heading into a quiet period through Thanksgiving. We’ll see if the trade hibernates until then.

Technical:

Not that my writing isn’t confusing enough, I’ll try to beat it this time. There is a gap left from the September 2024 expiration from 499.50 to 493.00. Last week’s low was 496.00. That gap is finally getting closed. The elephant in the room is that now we have the Nov expiration gap and the older gap hanging over the market. The January contract settled on Friday at 560.50 with an RSI of 19.97%. Two takeaways: you can’t sell the January here, but your inventory is at a substantial risk over time. Macro: Hedge at $60, $80, and $100. Micro: When demand catches up, buyers will have PTSD thinking it is 2021 again. Buy cash or hedge.

This is the first time in many years that the risk is so evenly matched. There is a possibility of a $100 move in either direction. Hedge your risk! Your hedging dollars, if wrong, will be pennies per truck. If you don’t hedge and you are wrong, it will be bitcoins per truck. Hedging is a cost of doing business. Hedging is a medical insurance policy. Hedging is a production builder. For the mills, hedging is a paying customer who pays the next day. Hedge your risk and sleep better.

Recap:

The higher trend continued last week after a tariff announcement. The announcement cleaned up the tariff-free wood. The next batch has the tariff increase on it. It is hard to project the anxiety of the next push. Unless you were hiding under a rock or a really bad lumber trader, you had already been “good dealed” to death and have a fair amount of inventory. It looks as if industry has wood. Now if we continue to see decent mill outtake, we can surmise that demand has picked up, and our long-term dynamics have changed. There will be a time when outtake cleans up the excesses. It’s early. Today, it is an assumption. Tomorrow it may be reality. We are going into the week with a look at whether the market is better or not. Futures will see a roll or buying from the funds in November. My guess is that they are over 5000 short now with the bulk sitting in November. There was no report last week. The government shutdown is another in a long line of psychological negatives (headwinds) we have lived with this year. This housing market will rally when a “normal” reappears. That could be a long way off.

The market will never change its stripes. Selling a premium in futures is the business way to trade. If it is $200 OSB, $300 SYP or $420 spruce, you should sell the board. Now, if you think you own it at a level that can’t lose, then hang in there. The fact is attaching a hedge every time the spread is wide is how this business works.

Technical:

The technical oscillators are aging. They are running out of upside. With a gap from 597 to 604 in November we have the perfect correction setup. Again, this is not bullish or bearish, but pure natural. If the futures market doesn’t start to correct and fill the gap, the takeaway is a pending breakout up. This type of chart pattern in lumber generally gives off good trend analysis so we’re watching close.

Daily Bulletin:

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

Southern Yellow Pine:

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/southern-yellow-pine.volume.html

The Commitment of Traders:

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