10-18-2018: November Lumber: A Booming Economy Is Not Supporting Prices

(Click on links below. Whole page needs to load before links work.)

Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calendar Spread

Level Table
Other Factors
Recommendation

1

4     5

01     2

3     6


Introduction

Lumber prices recently went through an unsustainable bubble. A contributing factor was lack of liquidity for lumber futures. A primary catalyst was Trump-o-nomics and a continuing trade dispute with Canada aggravated by much higher tariffs on Canadian lumber imports. America can no longer supply its own demand for lumber and needs to import from somewhere.

Canadians are getting wiser in protecting their resources and limiting harvesting of lumber by government decree on government lands there. American needs to do more of the same. Certain states like Montana and Washington are disaster areas for deforestation, while Oregon and Idaho show more promise in government regulation and preservation of areas. The high cost of lumber has been coming down because of a bubble in the futures markets, but there will most likely soon be leveling off with the realization that global economic factors and demand will keep lumber prices supported.

Reactive technical factors suggest that we had to double-weight the news in our Decision Matrix in order to break a tie. Lumber charts look a bit "bottomy." But we think the decline in lumber prices will eventually resume, due to reports from analysts and the housing and interest rate situation.


Intermarket Analysis

We fed Lumber, Copper, and the U .S. Dollar Index into a neural network to get the following result:




Parabolic Chart

November Lumber:

Parabolic Chart


Nirvana Chart

November Lumber:

Initial Chart


News Analysis

Framing lumber prices have continued to tumble as supplies have easily outpaced demand across North America. Fear of more downside risk kept most buyers on the sidelines. A composite lumber price has fallen for the fifth week in a row. It is now at its lowest level since February, 2017. A limit-down move in the November futures contract recently and back-to-back days of plunging prices on the stock market gave buyers additional reason for concern.

Structural panel prices plunged by double digits as Hurricane Michael slammed into the Florida Panhandle. Traders lamented that a Category 4 storm pulls buyers into the market seeking near-term coverage, but that wasn't happening. OSB sheathing prices fell $20-30 across North America. A number of buyers were still working down inventory purchased in preparation for Hurricane Florence last month. Subdued sales in Southern Pine plywood persisted in spite of the storm. Western Fir plywood trading remained slow as recent trends persisted.

How that a new North American free treade agreement (called the USMCA) is signed, some lumber traders are wondering if Canada and the U.S. will hammer out a new Softwood Lumber Agreement. The short answer is probably not in the short term. U.S. softwood lumber exports to China declined to the lowest level since April, 2017 in August. North American medium density fiberboard producers are doubtful that a recent U.S. Dept. of Commerce ruling on Chinese imports will have a tangible effect on demand for their product.

A 72-hour notice of a labor dispute affecting sawmills in British Columbia, while workers so far have remained on the job.

The price of lumber futures is a bellwether when it comes to economic growth and global trade. Lumber is an essential construction material, and its price action reflects changes in interest rates, currency markets, housing and construction, and other markets. A lack of liquidity in the lumber market makes it susceptible to price gaps on the up and downside. Analysts now believe a recent lumber rallyi goit out of control. Rising interest rates are weighing on the housing market.

In a repeat of the troubles of 2008, brorrowers can have low credit scores and thousands line up for zero-down-payment subprime mortgages. Current mortgage rates are roughly 4.5%. People have to live in the homes they buy as part of the zero-down-payment requirements.

Exports of softwood lumber from Russia, Germany, and Nordic Countries have increased due to high demand for wood in Aiosa and Europe in early 2018. Six the ten largest lumber-exporting countries inthe world have increased their shipments in 2018. The biggest decline in exports has been from Canada, at the lowest pace in five years. Dramatic price fluctuations in lumber prices in the U.S. are a reflection of the strength of the U.S. housing market. U.S. lumber production was up 5.5% in the first four months of 2018. The biggest increase was in the U.S. west. Exports from Finland increased 8.7%. Saudi Arabia import volumes decreased by 49% in the same period.

The cost of protecting the U.S. lumber industry with high tariffs added almost $9.000 to the cost of a typical new home. Habitat for Humanity can't build as many homes as before.

The odds of settling a long-running dispute between the U.S. and Canada over lumber are looking bleak, according to one producer. Canada's legal battle to fight U.S. restrictions through the Woirld Trade Organization could drag on for another four years. Last year, the U.S. slapped a 20% tariff on lunber imported from Canada. This source supplied more than a quarter of what American builders use each year. Amercian producers allege that Canadian lumber is heavily subsidized.

Warnings began last May that high lumber prices could not last. Analysts believe the liumber market at that time had all the earmarks of an unsustainable bubble. In line with the bursting of bubbles in financial markets, lumber prices may drop over the next few years and on itno 2021-22. A retest of 2016 lows is a realistic target. U.S. average home prices reached all-time highs, with a long-term chart suggesting an unsustainable super-bibble there. Issues of affordability will rise.

Legislated harvesting limits in Eastern Canada, Ontario, and Quebec continue to face longer-term supply issues there. The result of annual allowable cuts have resulted in the closure of several pulp and paper mills and negatively impacted chip prices in some regions. Timber harvests in the British Columbia interior have also been limited. One source reports that there is not nearly enough lumber capacity in North America to meet U.S. demand by the end of this decade.

Despite a recent slump in lumber prices, our assessment of the news is that unemployment has improved to less than 4%, aggregate wages are increasing to around 2.6% year over year, and combined with what are historically low interest rates, and miillenials entering their prime houshold formation years, demand for housing is very strong. That will be a main contributor to the demand for lumber and building materials.


Point & Figure Chart


610.0|                                                                  T 10/16
     | CME - Nov-18 Lumber, 110,000 bd. ft. $/kbdf Cm.=0.38  Lim.= 9.5
     |
     |
     |
570.0|__________________X______________________________________________________
     |                  XO
     |                  XO
     |                  XO
     |                  XO
530.0|__________________XO_____________________________________________________
     |                  XO
     |                  XOX
     |                  XOXO
     |                  XOXO
490.0|__________________XOXO___________________________________________________
     |                  XOXO
     |                  XOXO
     |                  XOXO
     |                X XO O
450.0|________________X_X__O___________________________________________________
     |                X X  OX
     |                X X  OXO
     |                XOX  OXO
     |                XO   OXO
410.0|________________X____OXO_________________________________________________
     |                X    OXO
     |              X X    OXO
     |              XOX    O O
     |              XOX      O
370.0|______________XOX______O_________________________________________________
     |              XO       OX
     |              X        OXO
     |              X        OXO
     |              X        O O
330.0|X_____________X__________O_______________________________________________
     | O          X X          O
     | O      X   XOX
     | O    X XOX XOX
     | O    XOXOXOXOX
290.0|_OX___XOXOXOXOX__________________________________________________________
     | OXO  XOXOXOXOX
     | OXO  XO O O O
     | OXO  X
     | OXOX X
250.0|_OXOXOX__________________________________________________________________
     | O OXOX
     |   OXO
     |   OX
     |   O
210.0|_________________________________________________________________________
     |
     |
     |
     |
170.0|----|----|----|----|----|----|----|----|----|----|----|----|----|----|---
      1   1      1   11       11
      21570134569025712335678800
      12221201003101122022211201
      10112245910971242291215350
The above chart is giving a conventional sell signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal up period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "%R". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "%R" for Lumber (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has just triggered a buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $110. Initial margin on a single contract is $2,400. Use of options is advised.


Historic Range

If we discount the blip in 2018, scale trade sellers are entering the market for the long term in this price range.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Both large speculators and commercials appear to be getting increasingly-long. They rarely agree with each other.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a downtrend remains intact from the last volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Lumber March 360 Call and Sell (1) Lumber March 340 Call # 11.90 to the sell side or better.


o 1 o 2

o 3

o 4 o 5


Calendar Spread

What the Jan. - Jul.. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. The best time to enter or leave the above spread is when it is at +14.00 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -36.00 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be approaching the sell the far, buy the near point..





Level Table:

Level Table

The path of least resistance is down.
615.0|                                                                  R 10/16
 CME - Nov-18 Lumber, 110,000 bd. ft. $/kbdf Cm.=0.38  Lim.= 9.5
     |
     |
     |
565.0|P________________________________________________________________________
     |PPP
     |PP
     |PPPQQQQQ
     |PPQQQQQQRR
515.0|OOOPQQQRSS_______________________________________________________________
     |OORSS
     |OORRRSSSSTTT
     |OOORRRSSSSTTTT
     |NNNNNRRSTTTT
465.0|MNRRSTT__________________________________________________________________
     |JJJKMMMMNNNRU
     |JMMMNNTUUUUUW
     |JJJKKMMUUWWW
     |HJJLLLUVWWW
415.0|GGHHHHHHJKKKKKKKLLLLLLLUUUVWWWX__________________________________________
     |GGGGGGGHHHHUUUVVWWWWWXXX
     |BBBBCFFFFGUVWXX
     |BBCCCCEEFFFFFFVVVVVVVXXX
     |BBBBCDDEEEEVXXXX
365.0|AAAACCCDDDDDDDDEEEEXXXY__________________________________________________
     |AAAAACXYZZ
     |YYYZZZZ
     |YYYYZZZZZ
     |YYYYYZZZ[   <<<
315.0|ZZ[______________________________________________________________________
     |
     |
     |
     |
265.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO=-0.290
       1 1 1 1 1 1                                     1 1           1
       0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 8 9 0 0           0
       1 3 1 2 1 2 1 2 1 2 1 2 1 2 0 2 0 2 0 2 0 1 3 1 0 1           1
       7 0 3 8 2 7 1 6 2 7 3 7 1 5 9 3 7 1 6 0 3 7 1 7 1 5           6


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 10/12 ).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                     LBF9    January Lumber

                      High Price:  365.4
                   Current Price:  339.9
                       Low Price:  286.1

                            Risk: -0.157
                     Opportunity: -0.330

                    (O/R) Ratio =  2.110


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart - 1
Nirvana Chart + 1
News - 2
Point & Figure - 1
Cyclicals + 1
Seasonals + 1
Internal System 1 + 1
Internal System 2 0
Third System + 1
Historic Range - 1
Commitment of Traders + 1
Range/Volatility - 1
Level Table - 1
Other Factors - 1
Total - 1
Place 6 November Lumber on a Sell Watch with stoploss @ +12.55 above the get-in point when recent price is represented as "339.90".
____________________________________________________________________________________________________________________________________________W.Y.