The Leonard Lumber Report: October 25-31
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. Without further ado, let’s dive into this week’s assessment:
Weakness In the Lumber Market
If you haven’t noticed lately, there has been a weakness in the lumber futures market. January futures fell $113 with never looking up due to a combination of a flat cash market and end-of-the-month position evening contributed to the selling. The futures market saw outright long liquidation in all months while the cash trade was flat, leading the market to seasonally hit a flat spot in mid-October (this one started later and now has hit the slow period later than usual). The pattern will now be of planning for the first quarter and its needs. Price will be driven by supply as we creep move towards Thanksgiving.
The challenge now is to gauge demand going into the end of the year. There was a sufficient decrease in production for the mills to get control back, but the continued disruptions in the field didn’t create any follow-through. We now need to wait for the demand to pick up at a pace to clear out inventories. My guess is that this will become the norm for the next year or so. Historically the marketplace goes into year-end with the least amount of inventory for the year. This year we also see a slowdown in logging caused by higher log costs. This is not showing up in the supply chain as of now.
The algo selling is relentless. The end of the month selling of long positions created an excellent environment for algo selling. It took full advantage of the sales in the market. I expect to see them show up again this week, but it will go dormant without the other sales. It should be noted that we are seeing the fund type buying in January futures. It’s too early in the fundamental cycle to make much of a difference, but they are around.
Let’s Get Technical
621.00 is the 61% retracement in January of the move. The RSI is 24%, so at 621, the market will be in the oversold zone by then. With the algo, selling points are irrelevant, but there could be a pickup in forward interest with January futures nearing cash. That would slow the algo, and the oversold condition will carry more weight.
Final Takeaways
The trade has gone south. The hand-to-mouth traders are basking in the sunshine. Most have enough supply to keep them out. And finally, you have those who want to end the year with these numbers and not make a mistake. The net end result will be an underbought marketplace at some point. That said, I wouldn’t buy it just yet.
Open Interest
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About Brian Leonard
Brian Leonard is a 30+ year veteran in the commodities trading space. Brian began his career as an assistant in the Soybean pit in the early ’80s and moved on to wood products in 1994. Brian’s current role for RCM Ag Services is to serve as a Risk Analyst specializing in the wood products sector. His customer base spans a large spectrum ranging from wood producers to home builders with different risk management needs.
Do you have questions, or are you looking for more information? Reach out to Brain at [email protected] or 312-761-2636.