Friday, December 9, 2016
Full-time stock trader. Follow me here and on 12631
Joined Apr 1, 2010
8,862 Blog Posts

Listen to Lumber

(chart via CME Group)

Above is the chart for Random Length Lumber, taking into account the March 2013 futures contract. Over the past few years, the strength in lumber proved to be a leading indicator for the bullish action we had seen in the homebuilders and, frankly, all housing related stocks.

This week, though, lumber has sold “limit down” and is displaying what could be termed “three black crows,” or wildly bearish candles, since Tuesday, rejected away from prior late-2012 highs.

Now, I do not want to overplay this thesis. I already locked in partials gains in my Home Depot short this morning inside 12631, for example. However, I do want to emphasize that if this is a true double-top in lumber then the rejection away from this recent peak should be forceful. It is tough to call an end to such a strong, multi-quarter move in housing and housing-related stocks. But it does seem increasingly reasonable to think they got ahead of themselves for at least the next few weeks.

Watch lumber, and stocks like BECN LL WY for clues, in addition to the homebuilders.

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  1. Scott Bleier

    Is that one of the most perfect double tops you’ve ever seen? Just asking!

  2. razorsedge

    your sporting some major wood there buddy!

  3. Sooz

    Z..use to use lumber as an indicator in particular LPX
    oh such memories
    I do hold position(along with other housing plays..USG etc.)
    Acquired 09/12/2011
    +250.04% $5.91

    for the Love of wood..

  4. Bozo on a bus

    And to make matters worse, copper violently fell out of the big ascending triangle I had mentioned a few days ago. The optimist in me sees a potential inverse head and shoulders, which would be a continuation pattern. But this will take at least a month to complete if it even happens.

  5. the raconteur

    Lumber prices are highly seasonal so I would be careful reading too much into this. Moreover, lumber futures are super volatile and not necessarily a good proxy for overall prices; Random Lengths created a composite index that is more reliable, in my opinion but that’s besides the point.

    There is a decent amount of lumber capacity coming online too with the higher prices which will be a near term headwind. I wouldn’t be surprised to see prices drop further and then pick-up with the home building season in late spring.

    It’s getting much harder to increase prices because dealers have replenished their stocks over the past six months (they were extremely low) and input cost inflation is close to nothing due to huge deferred timber harvests.

    Net-net, there are plenty of lumber specific issues that will drive prices in the near-term more so than underlying housing demand so be careful of tying the two together.

  6. muktukchuck

    Lumber — maybe a different dynamic at work with China in the mix, until 5 yrs ago China was a non factor. Further, Japan hsg starts being brought forward in 2013/14 due to increased VAT taking affect 2014/15.