Building Opportunities That Stand the Test of Time. In Focus: Lumber

The 65% sell-off in lumber since March wasn’t a “wild card.” It was written in the Elliott wave cards!

by Nico Isaac
Updated: August 05, 2022

I, like so many people during the pandemic, went from "1-Click Buyer" to D.I.Y.-er, using the added time and subtracted income to teach myself things I previously paid others to do for me. Such as:

Converting the privet jungle that was my backyard into a perennially producing veggie garden.

Learning to bake my own bread from a sourdough starter and jarring my own fig jam.

And my most prized accomplishment, co-building a greenhouse from old barn timber, PVC pipes, and sheets of plastic. But to be candid, this house was left in tatters on its first attempt, after a wind-gusting rainstorm lifted the wood frame off the ground and pulled the plastic sheets off the sides. Let's call this the "before" pic:

The issue: our foundation wasn't stable enough. So, we got right back out there in the morning and started over, this time fastening the support beams into the ground with rebar stakes. That night, another storm barreled through, only this time, the greenhouse stayed intact. See "after" pic:

Nerdy as I am, I wondered about the foundation of mainstream market analysis, which is built on the assumption that "fundamentals" or news events drive price trends. In the end, does that foundation really hold up against the strong winds of reality?

Take the lumber market. At the start of 2022, lumber prices were on a tear, soaring to their highest levels in over a year. According to the popular news-moves-markets pundits, lumber's rally was supported by several bullish factors, including:

An ongoing shipping crisis in the building sector, a transportation worker shortage, wildfires and mudslides in Canada, crop disease from the mountain pine beetle and sustained logistics bottlenecks from Covid 19.

Wrote one industry blogger on February 16:

"Several factors...have bolstered the demand for new housing to levels we have not seen since the mid-2000s.

"The trends driving lumber prices higher will not go away anytime soon. The United States-Canada dispute over lumber tariffs dates back to the early 1980s. Permits for new residential construction remain near their highest level since 2006, while housing inventory is historically low.

"Expect lumber prices to be high for the foreseeable future...Futures markets suggest that lumber will remain above $1,000 per thousand board feet through September 2022."

Meanwhile, on February 22, Fortune nailed down a new "lumber bubble" in which prices have seen a "227% uptick since August." The piece, while warning of an inevitable pop, also conceded that "the timing of when a correction comes is a wild card."

That wild card, as it were, was dealt one week later when lumber prices peaked on March 4 and embarked on the powerful, 65% sell-off to annual lows on August 4.

In turn, the bullish framework for soaring lumber prices was verily torn apart by the strong gusts of reality. It happened for the same reason as my greenhouse: The foundation for this "fundamental" framework isn't stable.

So, let's go back to drawing board and start fresh using a different set of "stakes," as it were; namely, Elliott wave analysis. Here, on March 4, our Daily Commodity Junctures editor Jeffrey Kennedy this chart of lumber, on which he identified the rally from the August low as a completed wave B rally. As such, the next move of significance would take lumber prices back down:

And, this next chart shows how the bearish lumber frame stood up (or down, in this case) against the elements:

Now, the same mainstream experts are using the same set of external tools to explain why lumber prices are falling. Shares Business Insider on June 9:

"Lumber prices can't catch a break...

"The orderly decline in lumber prices, which have declined in nine of the last 11 weeks, comes as mortgage demand for homes falls to its lowest level in 22 years. That weakness has been driven by a swift rise in mortgage rates, which surged above 5% earlier this year and haven't budged lower."

What a perfect reason to explain why a market turned -- after the fact.

But if you want to use a model that prepares you for turns before they happen, our Commodity Junctures Service presents in-depth coverage of potential near-, and long-term trend developments in the world's leading softs, grains, meats and energy markets.

Of course, those employing futures to take advantage of these trends must always remember that trading futures carries immense risk and Elliott wave interpretations of price patterns and technical indicators are for educational purposes only. Had to work that in there, sorry.

Having said that, our Commodity Junctures Service is where education meets action -- try it and see for yourself.