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Technical Analysis of the Lumber Market

EconMatters's picture




 

By EconMatters

Housing Demand Thesis

The last two years rents have been rising primarily due to supply and demand issues. There hasn`t been enough multifamily housing to keep up with the demand, and as the employment levels go up and more millennials move out of their parent`s house, I expect the housing market to continue to be on the slow but steady upswing of the last several years for 2016.

 

I think more and more single family homes will have to be built to keep up with the demand as renters for the last couple of years start to want to build equity in real estate versus throwing the money away on rent. And I expect the trend of more multifamily housing projects being built to continue for 2016 as well due to the escalating rents as the population growth has outstripped the conservative building strategies following the housing bubble that led to the financial crash in 2007/08. The builders were just very cautious and financing was subdued to say the least and now there is a lot of catchup going on in the housing sector.

 

Technical History for 2015

 

I thought I would take a look at the lumber market as my spider sense tells me that lumber could possibly be a buy here for 2016 and beyond. The March Lumber futures contract is trading at around $255 per mbf on Wednesday as the calendar year of 2015 comes to a close. The Lumber contract reached a low of $226 per mbf in September of 2015 when the rest of the financial market was looking vulnerable during the end of the third quarter selling that picked up steam on China Recession concerns. The Lumber market has been putting in higher lows into year end, and it seems to be setting up nicely for a move higher into 2016.

 

2016 Technical Levels to Watch

 

The play is relatively straight forward as there is 4 month overhead resistance at $270 per mbf on the charts and a breakout above this level with a buy stop letting buyers take you into the trade is one way to play this projected rise in lumber prices for 2016. I would put my protective stop at $255 per mbf if I entered on the breakout of the $270 resistance level. My initial target would be $310 per mbf for a 2.67:1 Reward/Risk profile for the trade. I would judge the price action from there and the overall market sentiment with the idea of letting it ride from this initial profit target.

 

The next area on the two year chart for a profit target to the upside is the $340-$360 per mbf level. If you like to take half off and let the other half ride on the trade then this would be one way to play it by taking half off at the first profit level around $310 per mbf and then taking the second half off at $360 per mbf. One could also break the trade into 3 sections by having 1/3 of the trade riding for a breakout of the $360 level.

 

Just for perspective there is 15 year resistance around the $400 per mbf area; but one thing about financial markets is that a trader wants to see how the contract reacts to price at key action levels. Therefore it would be nice to pocket a nice chunk of profits moving your protective stop up in a conservative manner and letting the last 1/3 of the trade prove to you that the trade is done to the upside. If we ever broke $450 per mbf the charts say that $500 per mbf is definitely possible, as back in March 1993 the Lumber futures went as high as $493.50 per mbf.

 

In Summary

 

Of course there are a myriad of different trading strategies in how to best take advantage of this possible setup in the Lumber market from an entry and exiting standpoint. I just like to add some trading color to the analysis so that readers can better understand the context of the key technical levels to watch for in the Lumber Futures Market for 2016.  

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Thu, 12/31/2015 - 18:42 | 6983701 Dan'l
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As Obama and the RINOcrats stampede foreign workers to take American jobs of graduates sinking in debt, there will be no rebound in housing, except for the UN Agenda 21 cell like apartments. A new foreign worker enters the USA ever 29 seconds. No jobs for Americans and I don't care if you are black or white. If you are an American you have been sold out by Democrats and Republicans. You have no hope. Make sure you train your Indian replacements or you won't get your measly 3 weeks of pay, if you complete the training. Otherwise, you get squat! Time for a revolution against the Mark Facebergs and that traitor, Sheldon Adelson, that owns all of the big Vegas casinos, whose main concern is about Israel, anyway.

Thu, 12/31/2015 - 18:35 | 6983667 GTC
GTC's picture

I remember taking orders over to the lumber pit at the CME. There were only two locals making the market and boy did they fuck over everyone who traded. LOL

Thu, 12/31/2015 - 17:08 | 6983357 SmittyinLA
SmittyinLA's picture

Steel housing doh http://m.kodiaksteelhomes.com/?smallView=1

Everything about steel is predictable except the price.

Steel was competitive with lumber before steel prices collapsed, now it's cheaper, you can use lower skill labor with steel too.

Thu, 12/31/2015 - 16:43 | 6983270 claude
claude's picture

This analysis is so pathetic, it should come with a 'don't waste your time' tag

Thu, 12/31/2015 - 15:31 | 6982882 Clowns on Acid
Clowns on Acid's picture

Housing, even with mortgage rates at 3% (which is basically zero after tax deduction), requires subsequent cash flow to service the mortgage. This is the problem with the Fed's money printing drop. The Fed saved, then enriched the bankers / brokers, and then bought up 60% of the US mortgages outstanding. It's still not enough. Lumber prices are a tell, but the problem is more telling elsewhere.

The Fed will soon be faced with the situation of 50% collapse of the housing market prices (free market equilibrium price) or a Soviet style money drop and price "fixing" of housing via all sorts of mechanisms - including expansion of Section 8 housing, no money down mortgages, Fed "resettling" of muslim "immigrants", 20MM illegals qualifying for housing until they are green carded....etc.

So it is going to be Trump or Sanders for 2016 Presidential election. Hillary will be dropping out due to "health" concerns.

Thu, 12/31/2015 - 09:18 | 6981228 SunRise
SunRise's picture

 Good technical entry point,  Solid technical stop loss,  Multiple Technical Time Frames.  Technical Analysis is a risk-management approach and Non-Technical Opinions are just that: Opinions, when predicting human behavior.

Thu, 12/31/2015 - 16:25 | 6983187 t0mmyBerg
t0mmyBerg's picture

Yeah not bad.  Only recently in December has lumber spent any time above its 200 Day SMA for the first time since late 2014.  Broke the 6 year uptrend from the crisis low near 140 early this year (Feb).  I sold the rebound of that breakout and rode it down from just over $300 to about 237 in the Sep contract (like an idiot i failed to roll to Nov in a timely basis, Nov made a much lower low).  That was a great technical setup.  Sorry it didnt go a few dollars higher or I would have sold more.  One thing though.  Dont do more than about a 10 lot as you are lucky if Lumber trades 1,000 lots in a day.  Very illiquid.

Fundamentally though, one wonders whether there really will be a continued housing recovery stateside and Canada is probably done.  As a technical trade fine as it has been uptrending since the end Sep low, but stick with the money management rule strictly.

Thu, 12/31/2015 - 16:59 | 6983340 azusgm
azusgm's picture

Uncontrolled and increasing immigration could change some of the demand although most of those people accept relatively cramped living quarters as the norm.

Thu, 12/31/2015 - 08:12 | 6981208 Lumberjack
Lumberjack's picture

The only uptick has been repair on winter damaged homes and repairs of foreclosed homes bought up to be flipped. The recent tornado's will add a small bit but that is all I see. Recently, Weyerhauser purchased assets from Plum Creek (REIT) which does own a lot of timberland but Plum Creek bought those lands which included water/mineral and wind rights.  It also looks like they will try to develop and sell major subdivisions in pristine areas that Plum Creek proposed but failed to do.

The only Millenials I see moving out in the near future will be those who volunteer or are conscripted to fight in the current and upcoming wars. 

Thu, 12/31/2015 - 07:09 | 6981172 VooDoo6Actual
VooDoo6Actual's picture

Thee stupid continues to burn..

This whoie article is clearly disinformation  / misinformation etc

"I think more and more single family homes will have to be built to keep up with the demand as renters for the last couple of years start to want to build equity in real estate versus throwing the money away on rent".

 

Devolving....

Panem et Circenses

Thu, 12/31/2015 - 01:15 | 6980929 Vendetta
Vendetta's picture

Okie dokie

Thu, 12/31/2015 - 00:26 | 6980830 lincolnsteffens
lincolnsteffens's picture

The writer of this article is either an agent for the FED, the Real Estate Broker's Assoc. a mortgage bundler or some one looking to find buyers of his shares of a home builder REIT so he can get enough cash to short that segment of the market.

Peak debt, need I say more?

Wed, 12/30/2015 - 23:35 | 6980717 rlouis
rlouis's picture

Most common explanations for rising rents that I've seen neglect to consider the impact of rent control.  Yes, newly-built unit rents are sky high.  And newly vacated rents are outrageously high compared to only a couple of years ago. But stable units that have not turned over have had an effective decrease in rent (hedonically adjusted of course) because taxes and fees, owner paid utilities have all gone up significantly more than allowable rent increases.  The stable tenant base is not considered in the evaluation of rents.

In the SF Bay area; SF, Berkeley, Oakland, Alameda, and Richmond have rent control (the last two cities added it this year.)  Tenants with rent control are effectively locked in to their current housing with golden handcuffs and many wouldn't consider moving for a larger home or better job opportunity because of it.  As a result, the unit turnover is reduced, people stay put and when a unit does open up, the owner is forced to charge the highest rent possible because it only takes a couple of years for controlled rents to go negative for maintenance and depreciation. 

Consider for a moment a rent control ordinance that has allowed the average annual increase in rents to be 1.75% for five years and yet.... the IRS allows buidlings to be drepreciated straight line over 27.5 years at 3.64%.  Ignoring the land value, it's quite simple that if the tenants don't move, the owner is deep underwater in funding maintenance after only a few years.  What makes it worse is that some rent control ordinances limit the ability to recapture capital improvements to 70% of the cost.  Many rent control advocates want to limit the ability of property ownerrs to increase rents when a unit vacates and comes back on the market. 

Looking to invest longterm in CA rental property?  Be careful.  It looks as though more books are available on the subject, but one of interest some years ago was this:

http://www.amazon.com/Rent-Control-Realities--International-Evidence-Cou...

 

 

 

 

 

Wed, 12/30/2015 - 23:02 | 6980624 PoasterToaster
PoasterToaster's picture

Millions of empty houses and apartments rotting, Gen Y unemployed, and the future has never been brighter.  Maybe it's time to bring some of that government force against banks. 

We've been told for decades how important it is for government to regulate things, why not start with banks and their massive land grab after the recent mortgage collapse?  Power to the people baby, hand over all that housing.

Wed, 12/30/2015 - 22:44 | 6980581 Al Tinfoil
Al Tinfoil's picture

Which planet is the author discussing?

Thu, 12/31/2015 - 01:12 | 6980919 Vendetta
Vendetta's picture

Nobody sane really knows

Wed, 12/30/2015 - 22:25 | 6980526 ebworthen
ebworthen's picture

Multi-family units and palaces.

I wouldn't put my eggs in any commodity until the Ponzi equity markets collapse (again).

Thu, 12/31/2015 - 01:26 | 6980942 OldPhart
OldPhart's picture

"and as the employment levels go up and more millennials move out of their parent`s house"

Lost me right there.

That's the moment I knew Econmatters is full of bullshit.

I'm the controller for a construction supplier of ready mix, steel, road base, aggregate and steel fabrication.  The majority of our work, right now, is the remnants of Obama's focus on infrastructure back in 2009.  Now, is when the money is starting to be seen.  As far as private work, we're still at 2009 levels, though there's chatter that a few idiots are designing 'master-plan' communities out here in the Commiefornia desert (with no idea how to provide water).  One town is excited over the prospect of tripling it's residential size in one project.

We still have entire neighborhoods of McMansions that are empty.  Behind Jess Ranch golf course there are McMansions on both sides of the road in gated communities.  Only the ones on the east side have any people living in them.  The west side is pretty much empty (last time through that area, maybe five years ago).

But we're still selling rock, ready mix, steel and steel fabrication to where we're almost 40% of where we were in 2006.


Thu, 12/31/2015 - 05:57 | 6981132 JerseyJoe
JerseyJoe's picture

This fall, I was doing housing inspections in one of the highest real estate taxed states in the union (guess - see handle).  I visited several McMansion farms and some custom neighborhoods in nice areas.   One Toll Brother neighborhood - the five BR, five bathroom, three car garage on acre plus variety had numerous foreclosures, or empty houses that couldn't be sold and every house was at least $200 to $300K UNDERWATER (or more because the market price was still unknown with auctions pending).   All the neighborhoods were struggling price wise and most were owned by empty nest baby boomers WITH NO ONE TO SELL TO!  (Duh!)

On the flip-side, my sister-in-law lives in an older neighborhood near the former GE world HQ - that they abandon many years back for greener - less tax corrupt pastures... Three older houses all in very good shape on a short, low traffic block...all have been on the market more than three years (and priced down)... Two have never even had a call to visit.   

Yeah housing rebound...LOL.   It is called demographic shifts and declining income.  This author is either a nitwit or a shill.   

(BTW One custom house needed to be measured for the tax record...175 feet across the front.   Good luck with that albatross.  Every one in that neighborhood was either Chinese or Indian and for some reason - Perhaps having never lived in a single family house growing up - the houses were mostly poorly maintained.  One had two foot high weeds growing through their 300 foot long custom brick round-about driveway. Apparently they bought it as investment and had little clue of the maintenance issues - which obviously - the bigger the house and property - the bigger the maintain issues.)

It was disturbingly confirmational for me...being from the peak year of the pig-through-the-python baby boom.   If you were paying attention - it was hard to miss the implications.  Can you say healthcare, adult communities, assisted living and funeral homes - couple that with ballooning SS payments out of the "Trust Fund" LOL!, Medicare/caid costs...  

Taxes will kill housing if not basic economics and demographics.   

Zerohedge has a real sense of humor putting this up.  

 

 

Thu, 12/31/2015 - 16:02 | 6983082 yellowsub
yellowsub's picture

But New Jerseyans are ok with high property tax because of the "great" public education system.

Thu, 12/31/2015 - 15:23 | 6982887 Clowns on Acid
Clowns on Acid's picture

Jersey J - I love boots on the ground reports. Thanks. You should send this to Yellen and her boss, The Nose Knows Fischer. They need too gear up that money printer and helicopter for 2016.

Of course the Fed may delay any immoral money printing and selected group drop until after the REP nomination is settled. 

Thu, 12/31/2015 - 15:57 | 6983056 bamawatson
bamawatson's picture

i am board by the lumber market

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