Commitment of Traders: -105 industry longs -104 spec longs
The fundamentals of our market are sound. Repeat; the fundamentals are sound, and there is a strong backlog of business. More business appears every day, and the marketplace is accepting these price levels. That makes today’s market fundamentally sound. The issue is that a lot of that new business has already been bought, and there is prompt wood all over. That leads to the trade having to define its value areas.
It is complicated to define value today. The manufacturing of this widget has too many components to peg a price to, and it wasn’t long ago we saw a survey that had 83% of respondents calling for a run back to $1,700. Today you have an industry frozen because of last Mays trade, and we end up with a sideways trade.
The best way to judge price with so many outside issues is to look at the technical read and the trend. A picture is worth a thousand words — the futures market is in a firm channel down, and the high channel sits at $915 while the low end is at $640. This is a 3-month channel that is slow moving, and it could take a month to get to the $640 area. On the flip side, the market would need a change in dynamic to run through $914 and stay.
Take a look at the chart below. A correction should close the gap above, which was left on Friday. If we don’t correct this by Wednesday, July may be back in the $600 quicker than most want.
The Leonard Lumber Report is a new 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.
May Futures: 1002.60 +113.60 Open Interest: 2848 +66 CoT: + 108 Industry
It was a grind higher week in futures as the cash trade found traction. The timing of this cash buy has come about earlier than many would have liked. Logistics and timing continue to be the issue, and these issues have pushed the trade to the futures for some upside risk management. In today’s volatile environment, most find risk management to be a must. The futures did see light selling by Friday, but it mainly was Dow-related.
It’s time to reintroduce the elephant. The great debate is whether there will be a soft or hard landing. In either case, the ship is going down, and the question is how hard it will hit. While that is an interesting debate, we know the housing sector will be the first to show the negative signs regardless.
Today the buy-side of the industry is trying to navigate the great unknown. There isn’t a big push to own wood, which keeps the marketplace slightly underbought. Contracts and programs are just enough to keep the pipeline flowing. Logistic issues are now having a negative effect on buyers. Instead of a rush to own enough, the buyer is stepping back and just filling in. Another panic buy is looming out there, but the quantity may be less this time. That is troubling long-term.
Let’s Get Technical:
A while back, the support and resistance channel in May showed an intersection at the $1000 mark, and here we are. Today we have the 100-day moving average meeting the top of the Bollinger band at 1049.60. The 200-day is meeting the bottom of the bands at 861.80. That typically would lead to a breakout. Today it could be signaling a sideways trade. The chart pattern calls a sideways trade from $1200 to $800. The bands are calling it $1050 to $860.00.
Outlook:
There is a change in this cycle’s features going on. Those who limited exposure for the last few years also limited their profits. The cycle is now moving towards those who limit their exposure will be limiting their losses. While that isn’t the case today, the momentum is swinging back. This new feature of limiting exposure is creeping into the industry at a time when demand is good. That leads to tightness. Every dollar higher also leads to less buying. This creates a positive cycle staying in place for a long period. That is what the market indicators are telling us. The short-term investment could be long lumber futures and shorting ARC…..
The Leonard Lumber Report is a new 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.
Before YouGo…
RCM Ag Services put a unique spin on National Agriculture Day by going international. That’s right, we jumped right into international waters with Maria Dorsett from USDA’s Foreign Agriculture Services for an interesting discussion about linking U.S. agriculture to the rest of the world.
Each year, March 22 represents a special day to increase public awareness of the U.S.’s agricultural role in society, so why not take it one step further by bringing in a global component? As the world population soars, there’s an even greater demand for producing food, fiber, and renewable resources. That’s why we’re taking a deeper dive into the USDA’s trade finance programs, like the GSM-102, which supports sales of U.S. agricultural products in overseas markets and supports export growth in areas of the world that are seeing some of the fastest population growth.
So, jump aboard (no passport needed), as Maria discusses how U.S. companies use GSM-102, what the program features, and the benefits that it offers!
The biggest takeaway from last week’s trade is that lumber cycles develop and remain in place. We as an industry try to decipher each outside influence on pricing to help make a call for a reversal or add to the confirmation. That was the case last week as a flood of news, noise, and reactions flipped the bull or bear switch a few times. By Friday, all we had was a lower price for the week. The key to businesses is to judge those cycles to be buying on the way down and selling on the way up. Is that possible today with a different rumor every other day and late ship times?
Cycle:
Cycles in lumber were generally easier to determine as they tended to relate to expirations, holidays, and seasonals. Today, they still relate but are also influenced more by previous trading and potential upcoming issues. This last upcycle, which may still be in place, has lasted longer than most at this time of year. This late Nov to early Mar run was unusual. But if we go back to where the market started in terms of moves, you can see how it became more underbought than usual and thus extended this upcycle. Another factor was that it took longer for the buy-side to reenter the market after the scaring it just took. That is also why you can’t call this upcycle done because the industry has not returned to the normal inventory building. It probably never will, but it’s always underbought in a good demand-driven market. If that catches up to this market, it will rally again.
Economics:
The publicly traded homebuilders, distribution, and producers are not the darlings of Wallstreet anymore. And why is that? Higher rates and inflation kills housing markets. The only way to come back into favor with the street is through increased sales. If the home builders can ramp it up for the rest of 2022, all three of the sectors will do better. My guess is the plan will be to increase construction based on the uptick in business showing up on desks.
Outlook:
The market has two opposing dynamics at work today. The one is good demand that is neither letting up nor getting bought for. The other is rising rates etc. Rates will be an issue, as we can see by Wall Street’s attitude towards the industry, but at the end of the day, this is a micro-focused industry. It looks only at the immediate buy or sells, and today it is looking for that cheap buy.
** There has been an increase of open interest of about 400 contracts. Almost all of that is from the industry, and it is evenly split between buyers and sellers. Many have realized the benefits of using the board to protect themselves from the ever-present swings.
The Leonard Lumber Report is a new 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.
Before You Go…
RCM Ag Services put a unique spin on National Agriculture Day by going international. That’s right, we jumped right into international waters with Maria Dorsett from USDA’s Foreign Agriculture Services for an interesting discussion about linking U.S. agriculture to the rest of the world.
Each year, March 22 represents a special day to increase public awareness of the U.S.’s agricultural role in society, so why not take it one step further by bringing in a global component? As the world population soars, there’s an even greater demand for producing food, fiber, and renewable resources. That’s why we’re taking a deeper dive into the USDA’s trade finance programs, like the GSM-102, which supports sales of U.S. agricultural products in overseas markets and supports export growth in areas of the world that are seeing some of the fastest population growth.
So, jump aboard (no passport needed), as Maria discusses how U.S. companies use GSM-102, what the program features, and the benefits that it offers!
Disclaimer
RCM Ag Services is a registered DBA of Reliance Capital Markets II LLC. Trading futures, options on futures, and retail off-exchange foreign currency transactions are complex and involve substantial risk of loss and are not suitable for all investors. Loss-limiting strategies such as stop loss orders may not be effective because market conditions or technological issues may make it impossible to execute such orders. Likewise, strategies using combinations of options and/or futures positions such as “spread” or “straddle” trades may be just as risky as simple long and short positions. There are no guarantees of profit. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. You may lose all or more than your initial investment. You should not rely on any of the information herein as a substitute for the exercise of your own skill and judgment in making such a decision on the appropriateness of such investments. Opinions, market data and recommendations are subject to change without notice. Reliance Capital Markets II LLC shall not be held responsible for any actions taken based on this website or attached links. Parties acting on this electronic communication are responsible for their own actions. Past performance is not necessarily indicative of future results.
