The Lumber Bull Goes Up in Flames: How to Find the Real Ignition Point

Early this year, "several factors" supported lumber's uptrend. So how can we say the 70% crash that followed makes sense? Very easily!

by Editorial Staff
Updated: October 12, 2022

This weekend, I attended a rural farm wedding in which the bride and groom exchanged their vows beneath this gorgeous, hand-built wooden altar. The unique centerpiece was delicately constructed out of bamboo, fallen oak limbs, and mesquite bound together on a base of freshly shorn pine.

Later into the evening, after the toasts and musical performances, the couple returned to the altar, lit two wicks on either side, and slowly walked away when in 3...2....1, the sparks of fireworks ignited and the entire wooden masterpiece went up in flames! (We do NOT recommend trying this at home!)

The gesture was meant to convey the impermanence of life, the importance of non-attachment, and the committment to love in the face of change.

Turns out, the global lumber market has experienced a very similar conflagration this year. After hitting a one-year high in March, lumber prices went up in flames, disintegrating 70% to their lowest level since before the pandemic. (Headline from the Wall Street Journal, September 27)

And yet, the sentiment surrounding lumber's combustible decline is not so endearing as the message of the burning marriage altar. Writes Markets Insider on September 22:

"The lumber market continues to be in a state of overall malaise as buyers anticipate lower overall demand going forward. Many yards are trying to pare their inventories to minimum levels and have really no fear of price upside."

Adds one lumber industry report on September 28:

"If the chart of the weekly lumber futures price for the past two years was an EKG, the patient would be in need of a defibrillator, stat."

According to mainstream experts, lumber's crash is a direct result of the "aggressive" rate hike campaign embarked on by the Federal Reserve this year. But if you look back, you'll see the Fed's first rate hike -- a .25% increase on March 17 -- was about as aggressive as a baby lamb. Rates didn't reach a full, percentage point until May, long after lumber's downtrend had already caught fire.

Not to mention the fact that before peaking on March 4, lumber prices had soared 227% since August 2021 to one-year highs. And according to the same batch of experts, the market for wood stood on very solid (and flame-proof) ground.

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."

In turn, the rate-hike-killed-the-lumber-bull argument is problematic at best; at worst, it's an attempt to divert investors' attention from the fact that those supportive "fundamentals" meant to drive lumber prices higher -- didn't.

So, if rate hikes weren't the ignition point of lumber's pyre... what was?

Well, on March 4, our Daily Commodity Junctures editor Jeffrey Kennedy presented 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 captures the 70% selloff that scorched the market since:

As the wedding altar so brilliantly conveyed, all things in this life are impermanent, including market trends, which constantly change.

But if you want to use a model that prepares you for those changes 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 all trading, and futures especially, 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.