Lumber’s Bubble Has Burst, But Timing It Wasn’t a “Wild Card”

In March 2022, Elliott waves showed lumber’s rally wasn’t built to last. Since then, prices have been chopped down to a stump.

by Nico Isaac
Updated: May 11, 2023

As the world looks out in the month of May 2023, it's as if the great Etch-a-Sketch of life has been given a good, hard shake and, one by one, the seemingly permanent markings of the last 3 pandemic years have been erased. Now (hopefully) on the side of "AFTER," many of our lockdown attitudes and routines are returning right back to where they were "BEFORE."

The D.I.Y. homesteading bandwagon we all jumped on (don't pretend you don't have a pantry full of canned peaches and fermenting sauerkraut!) has now given way to store-bought Sourdough loaves and Sunday brunches with friends.

The long, slowed-down walks in nature have given way to power-hour aerobic classes at bootcamp gyms.

The dedication to explore our local streets and acquaint ourselves with our neighbors has found a backseat to a renewed thirst for international travel and adventure.

And in the area of commodities, lumber prices have also returned to their pre-pandemic levels in May. Some people say lumber is an indicator of broader economic health, when there isn't the random string of wildfires, supply bottlenecks, lumberjack strikes and so on.

Mainstream analysts say the drop in lumber prices is due to a cooling down of the overheated housing market amidst a great "re" set (different "R" word!) of demand for new homes. This explanation rings true as data point upon data point confirms a contraction in real estate. But that's now, looking back.

But what about before? At the start of 2022, to be exact. Then, lumber was one of the most beloved commodities among raw material bulls. Prices were on a tear, soaring to their highest levels in over a year. And, according to the news-moves-markets pundits, there was no "Great Reset" in housing's future, only a great resurgence. On February 16, 2022, Newsweek laid this foundation for an ongoing lumber price surge:

"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 was dealt one week later when lumber prices peaked on March 4, 2022, and embarked on the powerful, 70% sell-off to pre-pandemic lows we see today.

But in no way was that reversal unforeseeable. On March 4, 2022, our Daily Commodity Junctures showed this long-term chart of lumber prices:

There, we identified a bearish Elliott wave set-up in the form of a zigzag price pattern. For newbies, a zigzag is a three-wave correction labeled A-B-C (pictured here), in which wave B terminates below the start of wave A.

The other distinguishing characteristic of zigzags is that wave C travels significantly beyond the end of wave A. In this case, with wave B complete, lumber prices were headed down in wave C to below the termination point of wave A at 448 in the months to come.

And, as the next chart of lumber shows, that's exactly what transpired as lumber prices were chopped 70% down to their pre-pandemic stump:

In the end, lumber's 2022 uptrend wasn't written in the "fundamental" cards; nor was predicting its reversal a "wild card." From an Elliott wave perspective, the shift from one-year high to 3-year low is the honest work of market psychology unfolding in a predictable pattern.

And on May 5, our newly re-launched, long-term trend-watching Commodity Junctures Service shone its spotlight on lumber. In the May 5 episode, editor Jim Martens revealed the key price level lumber would have to scale in order to signal its long, lumbering downtrend had reached its end.

Of course, trading futures carries immense risk. But if you want to employ a model that identifies potential directional changes before they happen, our Commodity Junctures Service presents in-depth coverage of potential near- and long-term trend developments in softs, grains, meats and energy markets.