Recap:
The futures market got crushed last week. The lack of a cash market increased the negative momentum. It was, as one trader put it, a “strange change in dynamics.” On almost every break in the last 16 months, the mantra was to buy it lower. We did that dance under $520 and again under $500 numerous times. Last week, the majority were preaching to sell a bounce. That is a definite change. That said, let’s wait to sell the farm.
The starts and permits report come out on Tuesday. They are looking for a number around 1.5. I struggle to see how, with the current reduced production, there can be an abundance of wood. We do generate abundance with every buy, but that is drained over time. This last buy round was more aggressive than usual. Traders became more confident and added purchases showed this. Today, we are living in the glow of that abundance. It will get cleaned up.
Economic:
We talked for months, going on years, about the probability of something breaking in the system. I’m worried the Fed can upset the marketplace with continued bad decisions. They want to cut interest rates while still carrying a large balance sheet. Continuing to push money into the system and cutting rates in an inflationary environment will choke off the market. And just to be clear, we are the first to feel the choke. I am worried we are seeing it in the multifamily sector already. Disrupt the apple cart, causing unemployment to rise, and we get the single-family sector to start to feel that choke.
Our last rally was a needed fill-in that was better than expected. This current downturn is the clearing out of those extras. Once done, another fill-in will be needed.
Technical:
The downside move last week was violent, to say the least. This pushed the RSI down to 11.80%. The selling is computer-related, driving markets well beyond the norm. Lumber futures went from $1250 to $1700 purely on computer buying. My point is that computers can move markets. Now that said, here it comes: the futures market has been following the cash market lower. The move in futures has been as much fundamentally driven as it has been computer driven.
This RSI extreme will correct itself.
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
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