LEONARD LUMBER REPORT: The futures market last week looked a lot like the Packers on Saturday, good early and then falling apart

Recap:

Bear down, baby! I’ll leave it at that. The futures market last week looked a lot like the Packers on Saturday, good early and then falling apart. What remains is a market that lacks follow-through in either direction. I think the reason is the abundance of data coming our way. A firm conviction can’t develop with this type of trade. Real production cuts are going on, but prices aren’t showing any signs of anxiety. There are starts and stops, but again, no real conviction. What we are seeing is the industry embracing the futures market in a big way. The last report, dated Dec 9th, has 7600 industry longs. That is a big number given such a consistent steep premium. Those who don’t own cash own futures. There are only 2500 commercial shorts, so the basis trade continues to be ignored. And that leaves us with 5500 fund shorts. They are rolling. This has been the makeup of futures all year. What happens is the longs overstay their welcome going into expiration, killing the front month. It is all liquidation, but very disheartening.

Things to watch for:

• A drop in January open interest indicates the longs are exiting early.

• Funds actually exiting their positions.

• Rates getting back down to 6%.

Any of these small, discrete changes could spark a significant rally in the market.

Technical:

The expected breakout from 563 petered out at 571 last week. There is still no resistance in January up to the 580 area, but there is also no follow-through. It could set back and take another short during the slow holiday trade, but we are seeing almost record volume daily. The funds like to be done by Christmas, so the race is on. There is less wood available. Prices should tighten going into January 1. Tell the longs to clean up early.

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