I don’t normally blog about commodities. But lumber is one of those commodities that people may be more aware of lately, even if you have no desire to speculate on the product as a commodity play. Whether you or somebody you know is building a house or building a deck, the recent parabolic move by lumber is making it more expensive to build right now. Here at ValueTrend, I’ve been trying to get a quote on rebuilding the deck at the back of our office building. There’s both a shortage of material and a massive price increase in my quote since last year.
The question for both lumber investors and end-product users regarding lumber is…will it last?
The charts below makes it pretty clear that lumber is overbought. I think it will peak out pretty soon, and find a reason to correct in the coming month or two. Here is what the continuous contract lumber chart is suggesting to me:
- Parabolic move: The stock has more than doubled since its lows in March, with literally no corrections between then and now. That creates a vertical chart pattern – an unsustainable one. Check the large white bars on the price chart (second chart down).
- Lumber sentiment is at the same level it was in 2018 before it fell hard. Chart below shows sentiment (blue line) well above the horizontal red “irrational exuberance” level. Chart courtesy of sentimentrader.com
- The 200 day SMA – red line on chart below- lies at $430, while the lumber contract sits near $730. That’s some 60% ahead of the moving average. I look at prices holding 10% above the 200 day moving average as a little overbought, and 20% ahead of that average as very overbought.
- Stochastics and RSI are way into the overbought zone. Watch for the hook down.
- MACD looks parabolic. Its not near crossing over or hooking down. But its imminent.
4
Conclusion
MACD suggests that lumber might have a bit more to go. But its a lagging indicator – so watch RSI and stochastics (and ROC or any other of your trusted momentum indicators) for a change in direction. They will give a clue before the big move down happens.
If you own lumber, enjoy the ride for the time being, with an exit plan. If you are building anything involving significant lumber supplies, well, it is what it is. But if you can put that process off – it might be cheaper to build next year, all things considered.
I’m off to the cottage until next week. Back with a new blog then.
8 Comments
“WITH RSI AT 76.8I, THE MARKET IS THE MOST OVERBOUGHT SINCE THE END OF DECEMBER. VOLUME CONTINUES TO WANE, BUT THIS IS NOT PREVENTING THE MARKET BENCHMARK FROM ATTRACTING THE NEXT MARGINAL BUYER AS MARKET PARTICIPANTS LET DOWN THEIR GUARD, SELLING BONDS AND BUYING STOCKS”. (EQUITY CLOCK, 26 AUGUST 2020).
BTW: THE PUT CALL RATIO ($CPC) IS AT .65: (ONE OF THE LOWEST IN 15 YEARS).
J.P.
Yes see my market musing blog–re the put/call ratio
I can’t recall now who it was who was commenting on this topic from this industry, but they were saying that supply won’t catch up to demand until next year, and that was assuming that the sawmills did not have to shut down again due to the virus. So who knows!
Good comment–food for thought…
Keith: I understand from a technical perspective your conclusion. However do “fundamentals” not come into the discussion? If for example there remains a shortage to demand and if housing and renovations still expect to remain strong, do the fundamentals not imply that a shortage will continue and if so commodity prices will remain high which keeps stock prices high?
Thanks
Daddyo–my understanding (and I am not an expert in lumber/building supply fundamentals) is that the shortage was caused by the shutdown on production during the pandemic–creating a delay in bringing lumber etc to market. I spoke with a hardware store on the weekend and he noted that pressure treated wood was arriving soaking wet, not able to dry before they put it on their shelves. But that’s all due to the shutdown. Now that things are operational again, my assumption is that production will return to meet demand as things normalize over the coming month(s). The charts suggest this potential from their overbought status.
Good Morning,
Do you still think that the Canadian dollar may go up only to 78 cents after the USA Fed indicated that the interest rate will stay low for a long run.
Kind regards
Sam
Yes, eventually Sam. Clearly, its not in the neartermed trend – but longer term both sides of the border are going to maintain low rates, so the playing field is level there. Where it differs is in the relative economic performance between the two.
Offsetting that is gold and base metals, which Canada has a stronger presence in. This gives the loonie strength in the coming year potentially. But that is to be seen if its enough to maintain a stronger loonie over the next several years. Again, I bet against that potential.