Category: Housing

10 Jun 2024

LEONARD LUMBER REPORT: THE GREAT LONG LIQUIDATION

Recap:

The great long liquidation. Between Monday and Tuesday, it looked as if the industry longs blew out. That was after a previous week of light liquidation. This blowout pushed July’s futures to a low of 484, which is at par with the cash market. That was a structural change to the market dynamics and should be noted for the future. By Thursday, July was back to a $30 premium and showing some confidence. So, in the short run, we are considering trading par too cheap at a $30 premium normal, and a $50 premium as a gift.

We are entering the summer months with some tough headwinds. We were told “rates higher for longer” 18 months ago. They were right. Any rate relief in housing isn’t coming soon. The other is the sharper-than-expected drop in multifamily projects in the regions that have led the way. Some are as high as 40%. As a trader, this is a lot to digest, but it looks like the market has already started.

RDFTV is a farmer’s channel. On Friday, they interviewed a SYP tree farm owner. He said SYP farmers never lose money. He must not have gotten the memo on the falloff of the multi-sector.

The cash market looks to have three zones of value today. The first is the current zone of $335 to $450. The market has spent a lot of time down here as it digests the less demand and good supply scenario we are in. The next is $451 to $500. And the last is $501 to $600 or shall we say the happy days are here again zone. It has bounced back and forth between zones 1 and 2 since the end of covid. It is not getting any help from the fundamentals to change that.

Technical:

The value areas and technical points are becoming a better road map than in the past. The two featured points today are the 200-day moving average at 562.50 and the value area at 440.00. That correlates well with the cash zone. The support area is the low of 484.00, and resistance is the value area of 520.00. A break of either could cause a nice little run.

Daily Bulletin:

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

The Commitment of Traders:

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

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

[email protected]

312-761-2636

29 Apr 2024

LEONARD LUMBER REPORT: IT WAS A BETTER WEEK FOR TRADING

Recap:

It was a better week for trading. The market seemed to drift into a bottoming formation, followed by a couple of good spike-up days and a new low for the move. We can call it a bottoming action, supportive, new low, or dead cat bounce. I heard all of them. What it did was cause the trade to be bullish one day and bearish the next. While the trade was highly volatile, the net for the week was only a $8 gain. What was different last week was that, for the first time, we had a few green shoots appear. From wholesalers covering shorts to mills holding prices, there was a better tone. We head into next week with a much more positive attitude.

While attitudes are better, most are very cautious. Prices have fallen far more than expected. Taking the cash market back into the $3’s should not have happened with all the shutdowns etc. The trade is now searching for the reason. Is there a more significant issue lurking out there? It’s hard to pin it on the market going too high, so it needed to go lower theory. I saw fear in the faces of some traders. They couldn’t sell a stick. We can’t blame the algo for that.

The industry is exiting shorts and getting long. Seeing them in a good flow instead of a battle is nice. This last trade report had short funds almost doubling their position while the long funds continued to exit. This report cuts off on Tuesday. I bet it shows the long fund numbers reversed and going higher on the next report. The trade at the end of the week had a fund tone to it.

Technical:

It’s harder to pull any green shoots out of the tech read, except it closed higher on Friday. This indicates that the battle down here isn’t over. The problem for the shorts is that the new volatility rallied futures $15 in a few trades. Your position can be upside down in a few minutes, not sessions. To summarize, the tech read calls for an ABC correction up, not a V bottom. The jury is still out.

 

Daily Bulletin:

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

The Commitment of Traders:

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

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

[email protected]

312-761-2636

15 Apr 2024

LEONARD LUMBER REPORT: The futures market got crushed last week

Recap:

The futures market got crushed last week. The lack of a cash market increased the negative momentum. It was, as one trader put it, a “strange change in dynamics.” On almost every break in the last 16 months, the mantra was to buy it lower. We did that dance under $520 and again under $500 numerous times. Last week, the majority were preaching to sell a bounce. That is a definite change. That said, let’s wait to sell the farm.

The starts and permits report come out on Tuesday. They are looking for a number around 1.5. I struggle to see how, with the current reduced production, there can be an abundance of wood. We do generate abundance with every buy, but that is drained over time. This last buy round was more aggressive than usual. Traders became more confident and added purchases showed this. Today, we are living in the glow of that abundance. It will get cleaned up.

Economic:

We talked for months, going on years, about the probability of something breaking in the system. I’m worried the Fed can upset the marketplace with continued bad decisions. They want to cut interest rates while still carrying a large balance sheet. Continuing to push money into the system and cutting rates in an inflationary environment will choke off the market. And just to be clear, we are the first to feel the choke. I am worried we are seeing it in the multifamily sector already. Disrupt the apple cart, causing unemployment to rise, and we get the single-family sector to start to feel that choke.

Our last rally was a needed fill-in that was better than expected. This current downturn is the clearing out of those extras. Once done, another fill-in will be needed.

Technical:

The downside move last week was violent, to say the least. This pushed the RSI down to 11.80%. The selling is computer-related, driving markets well beyond the norm. Lumber futures went from $1250 to $1700 purely on computer buying. My point is that computers can move markets. Now that said, here it comes: the futures market has been following the cash market lower. The move in futures has been as much fundamentally driven as it has been computer driven.

This RSI extreme will correct itself.

 

Daily Bulletin:

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

The Commitment of Traders:

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

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

[email protected]

312-761-2636

01 Apr 2024

Leonard Lumber Report: The hardest part of a lumber cycle is the drift

Recap:

The hardest part of a lumber cycle is the drift. The value of the commodity becomes a moving target, causing futures to erode to its last trading area. The futures market has been in a range from $560 to $595 since the end of November. Without the support of the funds, the market will return to that area and wait for the next buy.

The economy isn’t good. It is great. There is so much capital flowing out there that we can never discount the home market potential. This will be a $20 down $50 up market unless something breaks.

 The key points are the 38% at 598.80, the 50% at 590.70, and the 61% at 582.60. It could be the range areas.

Note: I see that open interest hit 10,000. Once the funds gear up, it will double. As I said before, even with 2000 open interest, I was able to trade large quantities with no price movement. This is a good trading market.

 

Daily Bulletin:

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

The Commitment of Traders:

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

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

[email protected]

312-761-2636

18 Mar 2024

LEONARD LUMBER REPORT: Last week, the futures market saw a healthy correction

Recap:

Last week, the futures market saw a healthy correction, dropping $22 in 4 sessions. March expired at 560, which was right in line with expectations. What was different was that most expected it to carry a premium, not a discount. My point is that this cash run has been far more significant than most expected. That leads to the question of how much was bought and whether it is enough. The cash side has hit the pause button to get a read of where they are. This is typical in any run but also leads to a quieter cash market and a futures correction. That sums up the week. Now what?

The industry focus is always on the micro. Today, wood continues to go out the door at a good pace. It has been a fluid trade for 18 months so that that feature will remain. The mills do have a tighter grip on certain items. This is related to logs and production. Most items are still under and over-produced within the typical timeframe. Timing that imbalance has always been a challenge. What remains in place is that a cash market run will not continue with some items tight and others abundant. The focus for this upcoming week will be on items liquidity. A sharply lower trade in May futures on Monday will give an immediate answer.

The macro picture has to be looked at. We can see the data on fewer shipments, log issues, fires, and the “worm.” What we can’t measure today is the potential headwinds of a slowing economy, rates that are higher for longer and affordability. All that is slowly creeping into the multifamily side of the business. That we can measure. The question is if a slowing multifamily sector takes the energy out of the starts number going into the fall. If it happens, we can expect a flat trading range that mirrors 2023.

The industry has to look to futures to lock in a profit or to mitigate risk. Playing supply spikes isn’t the best strategy.

Technically, this market has strong support all the way down from here. The key points are the 38% at 598.80, the 50% at 590.70, and the 61% at 582.60. A close over $620 indicates the funds are back in charge. 

 

Daily Bulletin:

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

The Commitment of Traders:

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

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

[email protected]

312-761-2636

26 Feb 2024

LEONARD LUMBER REPORT: IT IS STILL FEBRUARY

Note:

It is still February. I have to remind most traders of that. Most are trying to accelerate the cycle up a few months, looking for all the issues to hit. In reality, the market is trading at an average February pace. What is unusual is the added buying in the last few weeks. Most are trying to hold a consistent inventory level into the spring buy. The previous two weeks’ business was not an inventory build but a fill-in. That is mildly friendly.

It is a challenging environment to navigate. For every negative data point, there is a positive one.  You can’t get pessimistic about the housing industry. 2024 will be steady. The difference between 2023 and 2024 was that the lumber market was demand-driven. There could be a pivot coming to a supply-driven market. That is when the volatility starts. Last year, the cheapest, most abundant wood in the world was sitting at Port Canaveral. That is different this year.

Technical:

I am switching to the May futures contract for the tech read. Now is a good time to mention the significant gap from 572.00 to 566.00 under the market. For now, we aren’t going to worry about it. The RSI is 62%, with most momentum indicators pointing up. You can build a case that May has been a more volatile trade. That may indicate more volatility to come. A few extra cars with futures $30 over is a win/win.

 

Daily Bulletin:

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

The Commitment of Traders:

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

 

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

[email protected]

312-761-2636

29 Jan 2024

LEONARD LUMBER REPORT: CAN IT BE ANY MORE OBVIOUS?

Recap:

Can it be any more obvious? For many months, which are now turning into years, the marketplace has been perpetually short. Some by design and some by necessity. The market is always short. That had been a winning strategy. With a shift to tighter supply, pressure on the buy-side is coming into play today. Last week was a good example where an announcement of another mill closure set futures, not cash off. The industry adjusted by exiting futures positions, not buying cash. Where is the panic? The answer lies with the other obvious factor. As long as construction remains steady and mills produce, the industry can stay in this guarded mode. That is why the action last week was in the futures and not cash. The buy side will not go unless it is needed. Announcements won’t be a factor right after a buy round. They are a few weeks in.

The futures market has changed directions. Instead of bleeding the market to the downside, it will bleed the market to the upside. This is not fund-related or algo-driven. This is a simple cycle change. The potential for sharp upside moves is real. The ability to hold those gains is not so much.

Technical:

The elephant in the room is the gap below the market. I looked for it to get filled, only to see higher highs. The volume is too low to show a direction here. It is easy to hold the market up. A pullback into the gap is not a reversal. The technicals are positive. Basis trades are still in play.

 

Daily Bulletin:

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

The Commitment of Traders:

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

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

[email protected]

312-761-2636

08 Jan 2024

Leonard Lumber Report: The futures trade last week looked flat

Recap:

On the surface, the futures trade last week looked flat. The net change for the week was up $2. In fact, the last seven sessions have seen closes within a $4 range. A digestion phase after the run-up? Underneath the surface, things are changing. We have shifted the fund shorts over to the industry. Wood is now hedged. We have also shifted some of the industry longs over to new fund longs. The makeup of the futures market today is friendly. It is not a signal to buy, but it could generate higher prices on its own.

The futures market is closed on Monday the 15th, so January expires on Friday. The current open interest is normal for five sessions to go. With the growing industry’s short number, we may see some upward pressure again. We could see a shift to expirations now having an upward bias.

As far as the cash market goes, it remains fluid. That has been the case for months now. It has the feel of the covid slowdown that never occurred. This time, we spent a year expecting a recession and higher unemployment. What we found was steady business.

With mills coming back online and wholesalers owning wood, it could be sloppy for a while. The funds are the key.

This recent sideways trade is nearing an end…….

Daily Bulletin:

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

The Commitment of Traders:

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

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

[email protected]

312-761-2636

18 Dec 2023

LEONARD LUMBER REPORT: THE VOLKER RALLY

Happy Holidays to all and your families.

Recap:

The Volker rally. The markets reacted very positively to Powell’s comments on lower rates sooner. The comments were in stark contrast to the previous comments about higher for longer. The lumber market was no different, squeezing out gains for the week. So, while there are positives on the horizon, the facts are the futures market has been flat for over 75 weeks. (see chart below) That is a long time without a trend. The housing market has a like dynamic. if you look at today’s active listings, new listings, and closed sales; they are very close to 2019 levels. We are not coming out of COVID weaker or stronger, just flat. So, what has changed? The answer is two main drivers. The first has been the significant loss of production in Canada. That will continue with little chance of growing that back. The other is rates. The homes today are not affordable to many buyers. Higher rates also contribute to the pause in move-ups. The buying dynamic is flat.

Those two factors, supply and affordability keep the market flat. Either one would cause the market to trend but remain in conflict. One thing is sure: the tighter you control inventories next year, the more you’ll pay up.

Technical:

The Bollinger bands on a weekly chart are as tight as I have seen them. A spike through one of the bands is imminent. I expect a higher spike since the futures market sits near the top band. That said, if the market continues its drag sideways, look for an uneventful winter season. The market tends to hint towards a direction as we go into the Christmas holidays.

Note:

The open interest increase is industry-based this time.

Daily Bulletin:

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

The Commitment of Traders:

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

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

[email protected]

312-761-2636

27 Nov 2023

Leonard Lumber Update: I Will Continue to focus on the technical side of this market

Recap:

I will continue to focus on the technical side of this market. There are two takeaways from the weekly chart below.

The first read is that when a market goes through an extreme volatility event, there tends to be a corrective phase. You can see just how flat the market has become. In 2021 and 2022, the market experienced record prices and volatility. In 2023, the market has been flat. I wonder if the excess volatility has been sufficiently drained yet. The chart shows that futures can run another $50 higher and still be in the flat range. That brings me to read number two. This is a flat market working along its bottom. Rarely does a market break out down from this type of trade. The breakout is usually a retracement of the last move. So, this market has some room to run higher. I made a case in March, more than once, that the potential distance up is far greater than down. That math has stayed the same, but the timeline is in doubt.

The fundamentals are getting better as time goes on. The market is getting used to higher rates and higher home prices. A slight downtick in either stimulates more activity. I expect a continued start and lag with the buyers for another year, but the good news is the actual decline was marginal at best. My other soapbox rant continues to be the excess capital in the system. Massive capital injections are still coming into the market. There is also enormous capital sitting on the sidelines. And finally, 2024 is an election year. Enough said there.

Last week’s futures trade was a good read of the market. The recent Sept-Oct trend to new lows was more a sign of frustration than weakness. The bounce off those lows is a rebalancing, but last week’s positive trade showed underlying strength. The breakthrough of the 100-day average and the 200-day average indicated new strength. Two other keys are that Elliot Wave is calling the excess volatility gone. This is not a bottom call. It is a warning not to discount the possibility of some large spikes higher. If true, the other key factor could be a market exiting the focus of the 2020 to 2022 data and reverting to pre-2020 data and fundamentals. As we remember, that was an underbuilt sector with lessening production.

This week’s focus remains on the algo buying versus the premium. This is a very disciplined premium/discount trading market. It will have to meet somewhere in the middle. A good indicator of potential January weakness will be if the spread goes further. The upcoming roll might be enough to bring January closer to the cash market.

Daily Bulletin:

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

The Commitment of Traders:

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

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

[email protected]

312-761-2636