03-15-2-08: May Lumber: Home Improvement Store Sales Surge as Lumber Mills Shut Down
Lumber prices have taken a nose dive of late, as a point-and-figure chart reveals perhaps the most stunningly. We are of the mind that a move in commodities once underway, carries much further than most think it will. But this is starting to look ridiculous. How much further can lumber go without a violent reverse reaction? The natural tendency of most traders is to look for one. But what makes you think this rebound will occur in the very week to follow when for so many weeks the market has been consistently plummeting?
The problem began when "free traders" honored World Trade Organization brought against this country for protectionism, and got the government to lower trade barriers with Canada. A flood of Canadian lumber began pouring in, although not soon enough to prevent several Canadian mills from getting into real financial trouble or even going out of business. Add on to this the housing market crunch and the vast excessive inventories of new ticky-tacky homes on postage-stamp sized lots, and you have the makings for a lumber meltdown. People would rather fix up than buy new.
May Lumber:
May Lumber:
As of this writing, the March contract just expired. A run of buy stops were hit just before it closed one hour before other forward contracts closed. This was described by floor brokers as not havint to do with contract expiration so much as running of stops by traders once March was out of the way. Actual activity was light. So the runnup was entirely due to short covering. Buying interest was subsiding even before the last market close. There are reports of some producers restarting lumber mills. Placing more product in the pipeline is not good for lumber prices, but preserve local jobs. Many more producers are shutting down mills. Bernanke's comments on helping homeowners face foreclosures and also the nearing the end of the sub-prime crises after write-downs in the form of last shoes to drop did not seem to have much effect on the lumber market. Neither did British Columbia's mills' raising prices. The nation still suffers from an oversupply of houses, and is coming off a building boom even in 2007. Much of the tax refunds touted by Republicans will probably go into home improvement. Home additions and repairs are on the rise as the new house real estate market falters. Spring sales at do-it-yourself centers are up by as much as 25% over last year. Lumber Liquidators Inc., a large specialty retailer of hardwood flooring announced sharp sales increases. Ainsworth Lumber Company of British Columbia is having financial difficulties meeting debts. Simpson Lumber Co. of Tacoma, WA, is laying off 38 workers due to an ailing lumber market. Home sales and building permits in the region are down by about 37% from last year. Tembec Lumber Co. of Quebec is shutting down its mills for three months.
705.0I R 3/14
I CME - May-08 Lumber, 110,000 bd. ft. $/kbdf Cm.=0.38 Lim.= 7.6
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Our computer says reactive non-conventional approach to point-and-figure chart signals works best for Lumber. Therefore, the above signal is taken as a buy signal.
We are headed toward a cyclical high and a seasonal down period.
Our best-performing internal program is " Gotthelf." It is giving a sell signal.
Results of "DCV" for Palladium (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has just triggered a buy signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $110. Initial margin on a single contract is $1,898. Use of options is advised.
Scale trade buyers are entering the market for the long term.
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. Red is small speculators. Green is large speculators. Blue is commercials. Small speculators with the best track record are getting increasingly-short.
The average volatility shown below suggests that a major change in direction to up is imminent at a volatility low point.
Our option trade recommendation is to Sell the Lumber May 230 Call @ 12.70 or better.
Here's an intraday chart for the previous day ( 3/14 ).
Risk Versus Opportunity Report
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LBK8 May Lumber
High Price: 243
Current Price: 230
Low Price: 205
Risk: -0.116
Opportunity: -0.223
(O/R) Ratio = 1.923
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | - 1 |
| Nirvana Chart | - 1 |
| News | - 1 |
| Point & Figure | + 1 |
| Cyclicals | + 1 |
| Seasonals | - 1 |
| Internal System 1 | - 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Commitment of Traders | - 1 |
| Historic Range | + 1 |
| Range/Volatility | + 1 |
| Level Table | - 1 |
| Other Factors | - 1 |
| Total | - 5 |
Place 7 May Lumber on a Sell Watch with stoploss @ +14.40 below the get-in point.________________________________________________________________________________________________________W.Y.
