LEONARD LUMBER REPORT: The feature of the week was the extreme down move between Monday and Wednesday

The Lumber Market:

The feature of the week was the extreme down move between Monday and Wednesday. Sept futures dropped almost $46 in three days. At the same time, the open interest was rapidly decreasing. It was all liquidation. The longs were selling, the algo was selling, and the industry was buying their shorts back. The algo doesn’t accumulate a position, so it was all sides of the trade exiting. The Commitment of Traders report showed a sharp drop in the industry shorts. After nine sessions of selling, futures caught a breather on Thursday and returned to the sedate mode on Friday. At this point, the market needs a macro look now that most of the noise is behind us. The following points are key:

• Futures are trading under print.

• There hasn’t been enough trading to define a cash price.

• 6500 open interest signals that most of the industry has exited.

• Factors for housing demand remain flat.

• SYP has days when green shoots start to appear, only to end abruptly. OSB has nothing green around it.

• There is a lot of inventory, especially in the wholesale hands, that just got cheaper via future gains.

• For the first time all year, there is some momentum to trade. Most have been dormant all year. Any good news could find support.

It’s a tough call here. A bit of good news can pop the market, while no news erodes your inventory value. The data is neutral. I would look for a general pickup in demand or at least building going into the fourth quarter, but this outside noise never ends. Selling your cash is the best trade.

Technical:

The September futures have corrected 85% of the move. The majority of the time, if it goes 61% it goes 100%. That puts the 594.50 low as an objective. Now most are out of shorts already, so there won’t be a large volume to buy from here down. That makes least resistance down. The one caveat is that the RSI is only 20%. It needs a better correction.

Note:

Tuesday:

Starts 1.30 down from 1.32

Permits 1.39 down from 1.4

Friday: Existing a smidge higher…. more inventory, more sales.

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