My Listen to Lumber post last week got picked up by Joseph Cotterill at the FT Alphaville blog, which prompted Bill McBride of the esteemed Calculated Risk website to extrapolate on the weakness we saw in lumber futures.
Specifically, after quoting my post, Mr. McBride noted:
I have no comment on housing stocks, but I suspect this decline (in lumber) is either just “noise” following a large price increase, or more supply coming back on the market (remember many mills closed during the housing bust, and I suspect some are coming back online). Back in 2010, after the end of the housing tax credit, I noted that lumber prices collapsed. But the dynamics were different (that was obviously tax credit related and not a real recovery).
Keep in mind, Mr. McBride’s website is largely devoted to macroeconomic perspectives, while I am primarily intermediate-term market focused, with an occasional long-term thesis thrown into the mix. Here, the “noise” of lumber futures being rejected away from late-2012 highs may very well be just a blip in a long-term (years) uptrend.
But for our purposes as stock traders, the advance of lumber and housing/housing-related stocks over the past few years means we should at least consider the “three black crows,” or three consecutive daily strong selling candlesticks, precisely at late-2012 highs last week as a potential major source of resistance not yet ready to be overtaken by bulls.
Indeed, macroeconomic “noise” may very well be just that on a grand scale. However, for swing traders the notion of the momentum cutting both ways also needs to be considered.
I also had some insightful and intelligent comments in my original post, arguing that lumber is subject to seasonally weak periods. Here, again, despite the macro validity of such arguments, the important point for swing traders to acknowledge is that based on the past few years of market action, strong lumber has essentially equaled strong housing stocks. Should lumber build on last week’s weakness to the downside, the concept of the market already having adequately priced in the first leg of a housing recovery looking out several weeks or months becomes more pronounced.
FULL SOURCE: A Brief Comment on Lumber Prices by Bill McBride
ORIGINAL POST: Listen to Lumber