Traders Getting on "Board" the Lumber Rollercoaster
Fundamentals
The past 4 weeks have not been kind to Lumber bulls as nearby futures have tumbled nearly $55 per 1,000 board feet despite signs that the U.S. housing market is not getting any worse. However, there are now signs that the downtrend may have run its course. On Thursday, the National Association of Realtors (NAR) reported that sales of existing homes in June rose by a higher-than-expected 3.6% to a 4.879 million annual rate, up from a revised 4.72 million in May. This was the 3rd straight increase in sales, and some analysts believe this might be a sign that the worst of the collapsing housing market may be over. Inventories of unsold homes also fell to a 9.4 month supply, down from 9.8 months in May. Sales of new homes for June will be released on Monday, and traders are hoping for an improvement here as well. May new home sales totaled a seasonally adjusted 342,000 down 0.6%. If there was a downside to the existing home sales figures, it was that the median price of an existing house continued to fall, coming in at $181,800, down 15.4% from June of 2008, as 31% of sales were of foreclosed homes. Rising unemployment continues to be an albatross around the neck of the housing market, and today's weekly jobless claims figures did nothing to help the psyche of the market. Weekly jobless claims rose last week by 30,000 to 554,000 on a seasonally adjusted basis. Despite the higher jobless claims figure, Lumber traders began a buying spree after the Housing figures were released, sending the most active September and November contracts up the $10 limit. Also supportive was the announcement that a major Lumber company was planning a shutdown at one of its mills, which could help to support cash market prices. Large speculators are net-long Lumber futures, according to the most recent Commitment of traders report, and Thursday's sharp rally may encourage additional buying by these momentum traders.
Trading Ideas
Given the strong support seen in the September Lumber futures at the 180.00 area and the sharp price rise after testing this key price level, traders may wish to consider a bullish strategy in September Lumber futures options. One such trade is to sell the September Lumber 180 puts. With September lumber trading at 191.50, the puts could be sold for about 4.00 points or $4.40 per contract before commissions. Traders would be able to keep the entire premium received if September Lumber closes above $180.00 at option expiration at the end of August. Given the risk involved in selling naked puts, traders should monitor the position carefully and may wish to close out the trade before expiration if the September futures close below 180.00.
Technicals
Looking at the daily chart for September Lumber we noticed buying once again emerged when the 180.00 area was tested again. However, in order to turn the market bullish, we would need to see a daily or preferably a weekly close above the 100-day moving average which is currently near the 199.00 area. Given the trending nature of the market since the end of May, it may be time for a bout of consolidation between support at 180.00 and resistance at the 200.00 level for the next few sessions.
Mike Zarembski, Senior Commodity Analyst
