Wednesday, January 2, 2013
The Lumber bull market has begun to tire, as weak longs exited trades ahead of year end. Fears that the US may fall off the so called "fiscal cliff", which would raise taxes and force government spending cuts that could derail any economic recovery in 2013, may have been the catalyst for the profit-taking selling seen last week, as prices attempted to test the $400 price level. Large speculators were beginning to lighten-up on their net long positions prior to the Christmas holiday according to the Commitment of Traders report. Long liquidation selling during a period of light holiday liquidity may have accelerated the downside move, with prices moving down the $10 dollar limit.
Lumber prices were a top performer in 2012, rising by 47% in 2012, as a revival in the US housing market helped spur demand for building materials. Front month January Lumber prices came within a hair of testing major psychological resistance of $400 per 1000 board feet, which have not been seen since the heart of the housing bull market in 2005. Though Analysts expect Lumber prices to remain robust in 2013, the steep rise in prices seen in December may not last, at least in the short-term. Canadian Lumber mills are beginning to increase production, as current price levels are attractive for producers after years of losses that forced several mills to close during the housing market crash. In addition, there are concerns that Lumber imports by China will be lackluster in 2013. China consumes nearly 10% of global lumber production, so any slowdown in demand can have a sharp effect on prices for wood products. However, should the US continue to see a revival in the housing market and building permits continue to climb at multi-year highs, the Lumber bull market may still have some stamina in 2013.
Looking at the daily chart for January Lumber, we notice the sharp run-up in prices during the month of December, with a nearly $60 gain in prices at its peak last week. The 14-day RSI had moved into extremely overbought levels over 80 before a late week sell-off sent this momentum indicator to a reading in the low 60's. With prices now in a near-tem correction mode, we do not see significant support until the 20-day moving average (MA), which is currently near the 356.80 price level. Resistance is found at the contract high of 392.80 made back on December 27th.
Mike Zarembski, Senior Commodity Analyst