LEONARD LUMBER REPORT: The data told us what we already knew

The data told us what we already knew: the funds were selling the market. The Tuesday-to-Tuesday jump was close to 2,500 contracts. That could do some damage… and it did.

The industry used the break to liquidate shorts and add longs. By Friday, the market was $20 lower, causing many to start to second-guess their move.

This is not a bad level to be long from a fundamental perspective. The issue is how much more selling the funds have left before the roll begins. Most of the time, they will slow or stop outright selling and simply roll their position forward. After such a substantial selloff, I tend to agree with that view.

The debate now is about how much damage this selloff did to the market. Many are flipping that question around and asking, “How much damage did the false rally do?”

Going into the rally, supply was contracting at roughly the same pace as demand, creating a flat but tradable range. Producers were back in the black, and the industry was enjoying improved margins.

The rally disrupted the contraction plans of many producers, and now we are back to waiting for supply to contract once again.

Trading: With the RSI sitting at 14.20%, look for a bounce. Please note that this is the third Sunday I have said that, and the market is roughly $40 lower than when I first made the call. The funds have been relentless, but they do have targets. Mill breakevens and seasonal factors are part of the equation.

If they begin to roll their positions, futures could bounce back toward the $600 area. There are no clear value targets while the funds remain active participants. Instead, we go back to prior reference points where 596 was relevant, followed by 607 and the 618 area.

This downside break damaged several technical structures, and with meaningful economic help still out of reach, the funds may not be finished with the November contract. Housing remains unaffordable, and the industry is not underbuilt. It seems only the funds see it.

The White Sox are in first. That means the futures can rally.

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