LEONARD LUMBER REPORT: The entire economic world is waiting for the next shoe to drop
The entire economic world is waiting for the next shoe to drop. Well, last week the shoes got new laces. This doom and gloom weighs on us all. The housing sector may feel the biggest chunk of it. As we try to piece together all the reasons why lumber prices are low we may just be missing the key component. The 12-year bull market is over ending after the most volatile time in history. What’s wrong with the market falling back to more normal prices and staying flat for a few years? Is there any history to back that up?
The market spiked to all-time highs in May of 2018 and then settled back and went flat for almost 20 months. It was only after covid hit that the market changed dynamics. Those changed dynamics brought unprecedented wealth to this industry. Some would say unsustainable in an industry based on readily available and easily produced commodity. Now that the market has gone flat, firms are scrambling to see if the added structure will work or not. That dance keeps many out of the market or in it at a limited capacity. That quietness should also cause an underbought lumber industry which has yet to happen. We have grown so big that we can’t define small yet. The market will probably help out with that one.
Today’s challenge is how to trade a lot of wood for little money. A long runway to the upside is shrinking by the day. A profit quickly turns into a loss. Something unheard of only a few months ago. This type of cycle will bring the focus back to the use of risk management. Small losses will smooth themselves out. Big losses won’t. In recent years the reluctance to use futures was because it limited gains. Today you need to use it to limit losses. Defense is as much mental as it is physical. It takes time, energy, and studies to make it work.
Technically this market has been in a perfect down channel since May of 2022. One year later it is in the same channel without any indication of that changing. The 12-month stretch does allow for better analysis. From mid-January of this year, the market has developed an inter-channel with higher parameters. I was able to match both channels and tighten up the projected moves. Since we now need to focus on July (little) the support and resistance lines are both roughly $70 from the $500 market. The key points in July are $430 and $570. The momentum indicators show a low probability of reaching $430 from here. With the need for a buy round and a better probability for it to go up, I’m looking for the $570 to be the objective of a bounce. I will not rule out an expiration failure back to $430 but that’s not for today. Today the market will trade around $500 until relief shows up.
What we saw Friday was a relief rally across the economic spectrum. Let’s see if one is brewing down here.
Lumber Futures Volume & Open Interest
CFTC Commitments of Traders Long Report
https://www.cftc.gov/dea/futures/other_lf.htm
Lumber & Wood Pulp Options
https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf
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
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