LEONARD LUMBER REPORT: The market has a firmer tone to it

Weekly Recap:

The market has a firmer tone to it. Both cash and futures found support last week. Cash still struggles to find support for all items. That keeps the marketplace on edge. History tells us that distressed items like OSB or SYP will limit any spruce move. The difference this time is the fact that the market is firming on its own. Rumors help the futures market, but actual business supports cash. Bringing it back to futures, November was up $26 for the week with a Friday spike to $600. We spent the last 5 months looking for the catalyst to push prices higher. We go into next week looking for data to push it lower. That’s a good thing. It feels like a few years ago when the conversation centered on the price of production, with 1.3 starts and closures. It added up to the $620 futures number. Unforeseen was the drastic drop in all Chinese imports and the oversupply of OSB. All that has now been factored in. The question now becomes whether $620 futures and $508 cash are the magic numbers? We are not out of the woods, but the industry has become permabears. We saw that at the beginning of the summer, only to see November futures hit $712 on August 1st. “Hedge the premium and hope you lose money.”

The futures dynamics are returning to normal as the fund’s short positions start to dominate the open interest. The industry remains heavily long. This year, the industry has stayed in sync, while the funds have not. Spreaders are eager on this one, but history shows the industry often rolls longs to match the funds rolling shorts. This one isn’t an easy win.

Technical:

The outlook for the upcoming week is based on an if/then projection strategy. The 21-day moving average crossed above the 13-day on Friday. If that trend holds, the next target is the 38% retracement of 617.20. From there, we’ll consider 635.00 and beyond. The same pattern played out during the last two rallies. Positive fundamental data over the next few weeks will gradually develop; for now, it’s all about the technicals.