LEONARD LUMBER REPORT: Light at the end of the tunnel

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