LEONARD LUMBER REPORT: The market rallied $17.50 for the week before the turnaround on Friday
Recap:
The market rallied $17.50 for the week before the turnaround on Friday. Futures went from a discount to par. The bounce was not unexpected. A correction was needed after the longer-than-expected down leg we just sat through. With JIT inventory management, the buyers are near fumes after about four weeks. What was surprising was that most of the future’s upside was driven by speculative or fund buying, not the industry. Those in the industry could continue to pick off deals all week. That was the catalyst for the selling on Friday. Some of the spec side didn’t see the follow-through needed in the cash market to stay long. The week was either a month-end correction or a return to normal levels. As of now, it has yet to move the needle to support things.
Monday begins a new month and a new quarter with all its history. It is all irrelevant this go around. My mantra all year was that $380 mill is too low and not sustainable for the industry. Conversely, the market has been telling us what is too high and not too low. At this point, the fourth quarter will be when the market tests the recent highs and lows and tells us what is too much. In the meantime, let’s stick to the basics. An upcycle in the cash market is created when futures reach a sufficient premium to cash. If you can buy cash and sell something, we turn.
Macro:
The facts are that neither the housing nor the stock market has yet to feel the effects of higher rates. Yes, most markets gave up a lot of value in anticipation but haven’t felt the impact. At this point, we need to get past it. The quarterback is out for the season. Let’s focus on the backup. We will see less construction, less production, and fragile inventories. Buy breaks.
Technical:
Since April 2022, the monthly RSI has hovered in the low 40s percentage-wise. Even in the flat year of 2019, the market saw better volatility. A $100 move wouldn’t even move the needle. Something to think about. The market remains generally married to the technical read. Two weeks ago, the RSI hit 20.40, the stochastics crossed, and the low rested on the lower Bollinger band. Those three indicators have been consistent all year. The RSI hit 62% on Thursday. That was up 42% in a week. The rally may be limited with the upper Bollinger band sitting at 511.60 and narrowing. When the profit availability is as low as it is today. These little indicators are essential.
Daily Bulletin:
https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf
The Commitment of Traders:
https://www.cftc.gov/dea/futures/other_lf.htm
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
312-761-2636