RCM Ag Services

Category: Housing

27 Nov 2023
Agriculture, CME, Housing, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

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

23 Oct 2023
Agriculture, CME, Housing, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: We are all trying to shape this market not with clay but with wet sand

Recap:

We are all trying to shape this market not with clay but with wet sand. Each negative seems to overwhelm the positive. While the housing pace continues on its post-COVID run, there are signs of fatigue. As we measure ongoing business, we continue to get hit with bad news. The 8% mortgage was expected. The fact that it went from 8 to 8.10 in less than 24 hours wasn’t. We are seeing the fatigue factor mixing in with lousy economics. The next six months will be a street fight. The good news is this industry will stop buying, leading to higher prices. The question is when we will get back down to dirt.  Friday was a significant volume roll day. The roll has been orderly. The pressure came from accelerated liquidation. No spec long is a winner.

Macro:

We’ve been talking about how rising rates will break something. It is going to be housing. Now, the extent of the slowdown will lessen as time goes on and the marketplace adapts. Going back to January, construction was expected to be lower heading into the fourth quarter, but production and supply would also be down. That is where we sit and why the futures are stuck at $500. The challenge will be the short-term pressure the market will feel for the next few months as rates find a level. Core inflation is stuck at 4.1%. That won’t be to 3% anytime soon. In 2024, it is estimated that the US will spend $800 million to finance the debt. The Fed needs to sell a record amount of bonds. The hope is for the market to absorb all the bad news over time and not overnight hysterics.

Technical:

Technically, the market broke out to the downside and is now a sell with a 36.90 RSI. The market has seen these sell signals this year but with a very low RSI. This one has some room to go lower, and with all the under-the-table deals offered out there, it just may.

 

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

16 Oct 2023
Agriculture, CME, Housing, Lumber, Market Commentary, Market Updates, Research, Risk Management, Weekly Prices rcmagserv 0 comment

LEONARD LUMBER REPORT: The housing market is entering into a “great pause.”

Recap:

The housing market is entering into a “great pause.” That will show up as less buying, selling, and construction. The lumber side of this industry has already been in the great pause mode for most of 2023.

Housing has a typical pause nearing year-end, clearing the decks and creating a good spring. Some now are projecting the slowness to be carried through the spring. The futures market has been the best form of price discovery this year. The last few weeks have been a good example of that.

Futures rallied about $17 last week while the cash market collapsed. Futures had already made the low of $478 four weeks ago. The futures price is the “bid.” It is the market. That price is value. From here, we wait for cash to drift to the “bid.” If print followed the futures market, it would be much more efficient.

Last week, the futures trade indicated a bottom in the cash market at some point. The usual bottom is set when you can buy cash and sell futures. That is getting close but could lag. This is not a supply and demand issue. If the futures market at $506 is too high, then sell it. Forget the silliness of the roll or funds. $506 is a good hedge against that pine you just bought with a $2 handle.

Macro:

The housing sector is getting forced into a slowdown. This is not supply and demand. If rates were at 3%, we would be at 2 million starts. The underlying demand is there. The macro factors are too great today. The question becomes whether those factors increase or subside. Until that is answered, lumber inventories will be kept at a minimum and lumber contracts will be canceled. Cash is an investment that can be hedged today.

Technical:

Futures have a positive tone. The momentum indicators are positive. The RSI at 60% is neutral and finds buying on breaks. What it also has is major resistance every $6 higher. It has no room to run technically. Speculators can expect more upside from the roll while the industry has to form a plan to start hedging or creating a basis trade.

 

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

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