Will the Rally in Lumber Prices be Cut Down?
Fundamentals
What a difference a year makes! Last year at this time, front month Lumber futures were trading below $140.00 per 1,000 board feet price levels that were last seen in the mid-1980's, as the economic fall-out from the U.S. housing crisis was nearing its crescendo. Supplies of unsold homes on the market were soaring, and several home builders were forced into bankruptcy as the housing market ground to a halt. Since that time, Lumber prices have nearly doubled, as it appears that the recession has ended and economic growth has emerged -- although much more slowly than most of us would like to see. Inventories of existing homes have also fallen from the worst levels seen last year, standing at a 7.2 months' supply in December. Although it appears that the housing market is starting to recover, Lumber prices may have already priced-in a much better scenario than is actually occurring. December housing starts fell by 4.0% from November's totals, to a seasonally adjusted annual rate of 573,000, according to the Commerce Department. This is much improved from the 466,000 annual rates back in January of 2009, but not even close to the 2,276,000 annual rate seen in January of 2006! Although building permits in December surged by nearly 11%, one cannot help to wonder how new home sales will fare in the near-term, given the huge number of existing homes on the market -- especially those in or facing foreclosure. With unemployment still hovering around 10%, it may take some time for potential home buyers to feel confident enough to re-enter the market for new homes, in order to get the construction industry back on its feet and the demand for Lumber to improve immensely
Trading Ideas
The rise in Lumber futures prices has tied-in fairly closely with the recovery in equities prices, since the lows in both markets were made in the first quarter of 2009. The S&P futures have recently broken the uptrend line formed from the March lows, which could signal a major change in trend for equities. If so, it may not be long before Lumber prices also start to weaken -- especially if commodity prices follow equities lower. Given this potential scenario, some traders may wish to consider entering a short position in March Lumber by either selling futures out-right, or buying Lumber puts. Given the relative illiquidity of Lumber options, some traders may wish to consider selling March Lumber futures (currently at 250.80 as of this writing), with a buy stop above the recent highs of 257.30.
Technicals
Looking at the daily continuation chart for Lumber, we notice prices remain well above both the 20 and 100-day moving averages -- and more importantly, above the uptrend line drawn from the October lows. However, there are a few technical signals that signal a correction may be near. First, the trading volume has fallen sharply the past few trading sessions, which may be a signal that fresh buying is not emerging near recent highs. Also, the 14-day RSI is showing a bearish divergence, which can be a signal of fading upward momentum. A close above the recent high of 257.30 could trigger a test of the 270.00 level in the March futures, while a close below the 20-day moving average, currently near the 241.50 level, may set-up a test of support near 225.00.
MIke Zarembski, Senior Commodity Analyst
