Category: Hedging

Weekly Recap:

The market has a firmer tone to it. Both cash and futures found support last week. Cash still struggles to find support for all items. That keeps the marketplace on edge. History tells us that distressed items like OSB or SYP will limit any spruce move. The difference this time is the fact that the market is firming on its own. Rumors help the futures market, but actual business supports cash. Bringing it back to futures, November was up $26 for the week with a Friday spike to $600. We spent the last 5 months looking for the catalyst to push prices higher. We go into next week looking for data to push it lower. That’s a good thing. It feels like a few years ago when the conversation centered on the price of production, with 1.3 starts and closures. It added up to the $620 futures number. Unforeseen was the drastic drop in all Chinese imports and the oversupply of OSB. All that has now been factored in. The question now becomes whether $620 futures and $508 cash are the magic numbers? We are not out of the woods, but the industry has become permabears. We saw that at the beginning of the summer, only to see November futures hit $712 on August 1st. “Hedge the premium and hope you lose money.”

The futures dynamics are returning to normal as the fund’s short positions start to dominate the open interest. The industry remains heavily long. This year, the industry has stayed in sync, while the funds have not. Spreaders are eager on this one, but history shows the industry often rolls longs to match the funds rolling shorts. This one isn’t an easy win.

Technical:

The outlook for the upcoming week is based on an if/then projection strategy. The 21-day moving average crossed above the 13-day on Friday. If that trend holds, the next target is the 38% retracement of 617.20. From there, we’ll consider 635.00 and beyond. The same pattern played out during the last two rallies. Positive fundamental data over the next few weeks will gradually develop; for now, it’s all about the technicals.

“If you got long each time a rumor was sent out, you would have been buying the highs and exiting on a new low.” What a great observation. The news that a mill would operate for 4 days and curtail production sent the futures market sharply higher on Friday. To put things in perspective, considering all the positive spins last week, the November futures closed down $1.50. Today, closing or curbing production is an extreme move. It comes after the mills fill up the K-Mart parking lots, expand the vendor management programs, and establish unorthodox reload programs. In other words, when they have too much wood. This process is a slow chipping away of the excesses. I’ll be the first one to claim being way too early in the call for par. I’m worried demand is slipping, making the decreases a wash.

Another silent market killer is the fact that JIT has changed dramatically. There isn’t a day that the cash guys aren’t in the market. They continue to build long-term inventories, which is the opposite of JIT. The disciplined cash buyer has been the employee of the year for the last two years. When they buy it is at lower levels. That needs to change for the market to shift.

The rate cut will help the psychology of the market. It will be positive at some point in the months to come. For today, the industry wants a rally to hedge. The funds adding shorts can help with a pop. 

The Technical Read:

The biggest takeaway and risk I see today via the technical read is that November futures were at $712.00 on August 1st. We talked about how futures were at $418 in July of 2024. Well, August 1st. was only 30 sessions ago. That is a $200 swing in a flat market. There is no clever way to project the market. The simple answer is buying the discounts or selling premiums in futures, and then you turn off the emails. Today, the technical read is trying to indicate a slow bottom forming. We have been here before, only to see a sharp spike followed by new lows.

Under a 200-plus swing environment, there is no reason not to buy the cash items you need that are hitting new lows. There is no reason not to hedge at a significant premium. This is no longer a blocking and tackling drill. It is full pads, two-a-days. It’s all about discipline. It’s all about market parameters. It’s all about the plan.

Note: We were looking for a catastrophic September close. What if it spikes?

The Lumber Market:

The futures continue to stair step higher on its way to a new high for the move. A stair step higher marketplace is one that sees a buying push followed by a stagnant confirmation period. It tends to be the norm in a supply driven market. This one is driven by the risk of higher prices due to duties and tariffs, so you basically have to drag the buy community to the market weekly. The buy side knows that there will be higher prices, and the producers will try to pass it along.

What is interesting on this one is the fact that every aspect of the industry is running on shoestring margins. A rising price/flat demand environment is difficult to navigate. For those who have been proactive buying the deals and out of the market a week or two are now suffering sticker shock. This cycle had been set since February. Prices will go higher because of outside influences. Futures will continue up until the shorts blow out. It’s really that simple.

What this blowoff looks like is hard to define given the very light open interest overall. Most of the spec side is long and the industry shorts are basis trades. We will see what it looks like after we get there.

Back to tight margins. In the last week or so we talked about a possible increase in supply from Europe, the pacific northwest and SYP. We have been showing the data of the gains in SYP over the last few years on the spruce market. With extremely tight profit margins, the SYP alternative will continue to be embraced. It has slowly creped north up to I80. In a supply driven market, the dollar equation is king. A few dollars in cost savings win.

Technical:

The market is forming a defined wedge pattern which calls for a $70 move. 672 is the top line and 635 is the bottom. With a 61% RSI there is room in both directions. Nothing is showing up in the momentum indicators to signal a possibility of a move to that degree, but it is there. Sept futures have traded a lot of volume between $660 and $670. That seems to be the “area of acceptance” with the headwinds or(tailwinds??) in front of our market. I would expect a knee jerk reaction up with 660 now becoming an area of support replacing the area of value. This market can easily go back over $700 and then test $600. Any delay in an announcement and $600 may come first.