No Growth in Lumber Prices
Today's Idea
Some traders who are expecting Lumber prices to remain weak in the coming months may wish to explore initiating bear spreads in Lumber futures. An example of one such spread would be buying November Lumber and selling September Lumber. Currently, September Lumber is trading at a 3.00 discount to the November contract, and traders initiating bear spreads would want to see this discount continue to widen, with a potential target of a 20.00 September discount. Chart resistance on this spread is seen at a September 5.00 premium and would be a potential risk level on a closing basis should the trade move against the position.
Fundamentals
Weaker than expected U.S. housing starts in April did little to stall the bearish trend in Lumber futures prices, with the lead month July contract holding near contract lows. The Commerce Department reported that U.S. home construction fell by 10.6% in April, to a seasonally adjusted annual rate of 523,000. This was way below the pre-report estimate for a 2.7% gain last month. Building permit applications in April also fell by 4% from March's total to an annual rate of 551,000. The sharp decline in housing starts comes despite growth in the overall economy, as home buyers seem to be focusing on "cheaper" previously-owned homes -- particularly those in foreclosure. With home builders continuing to struggle, the demand for Lumber has also slumped considerably, with prices falling by nearly $100 per 1000 board feet during the past three months. The low cash market prices for Lumber, currently in the $215.00 to $220.00 per 100 board feet range, have some mills curtailing output, as the cost of production is above current market prices in some cases. Though Lumber prices now appear relatively "cheap" when compared to historic levels, we have seen prices trade well below the $200 level for the past couple of years, as the global recession played havoc on commodity prices. Until we finally see some signs of sustained improvement in the U.S. housing market, it may be difficult for Lumber prices to stage a sustained rally as we move into the summer.
Technical Notes
Looking at the daily continuation chart for Lumber futures, we notice prices have resumed their downward trend, after a brief period of consolidation between roughly the 240.00 to 260.00 area. Prices are now well below both the 20 and 200-day moving averages, and the 14-day RSI is nearing oversold territory, with a current reading of 30.47. Volume has been falling during the recent decline, as it appears that the recent wave of selling has been tied to long liquidation by large speculative accounts. Lumber bulls may wish to note that near-term futures prices are approaching the 61.8% Fibonacci retracement near the 215.00 level, from the 2009 low's to the January 2011 highs. This retracement level is viewed as an important support level by many technical traders, and if it fails to hold, sets up a potential test of the 78.6% retracement near the 183.00 area. Near-term resistance is seen at the April 12th lows of 237.20
Mike Zarembski, Senior Commodity Analyst
