Review Of Lumber
Eric De Groot | May 01, 2016 02:00AM ET
Lumber, a leading indicator of domestic and global construction, implies future weakness not only US home construction but also the global economy. The general observation of mark down across the commodity sector despite numerous countertrend rallies suggests deflationary forces and deflation throughout the global economy. This interpretation will gain acceptance when the business cycle transitions from prosperity to liquidation and the public loses money on the expectation that it can be prevented or managed.
Investors, largely driven by emotions rather than discipline, tend to focus on volatility rather than the message of the market. This tendency prevents them from recognizing better opportunities in 'quieter', less-followed markets such as Lumber.
Summary
The BULL (Price) and BULL (Leverage) trends under Q3 accumulation after the seasonal high position lumber as a focused bull opportunity since the the second week of March.
Price
Interactive Charts: Lumber, LUMBER
The long-term trend oscillator (LTCO) defines up impulse from 288.10 to 284.10 since the second week of March (chart 1). The bulls control the trend until reversed by a bullish crossover. Compression, the final phase of the CEC cycle, generally anticipates this change.
A close above 399.9 jumps the creek and transitions the trend from cause to mark up, while a close below 1830 breaks the ice and transitions it to mark down. A close above 293.10-299.20 maintains a bigger rally and favors testing of 2013 or 2014 resistance.
Chart 1
Leverage
The long-term leverage oscillator (LTLO) defines a bull phase since the second week of March (chart 2). The focuses the up impulse (see price).
A diffusion index (DI) of -39% defines a Q2 accumulation (chart 3). A capitulation index (CAP) of -8% supports this message (chart 4). DI and CAP's trends, broader flows of leverage and sentiment from accumulation to distribution and fear to complacency supporting the bulls (red arrows), should not only continue to extreme concentrations but also restrain downside expectations until reversed (see price). A decline under these trends, a sign of weakness (SOW), would be bearish for lumber longer-term.
Chart 2
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Chart 3
Chart 4
Time/Cycle
The 5-year seasonal cycle defines weakness until the fourth week of September (chart 5). This path of least resistance restrains upside expectations (see price).
Chart 5
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