“Timber!” on Lumber Futures After Technical Breakout?

Posted on Posted in Commodities

Lumber futures are one soft commodity that investors may want to keep on the radar over the next several months. The November-2017 contract expires in two weeks and rolls over into the January-2018 contract. (Note that if trading lumber futures is not exactly your cup of tea in terms of investment experience or risk exposure, then for an alternative consider Guggenheim’s MSCI Global Timber exchange traded fund: CUT, which is covered regularly along with other natural resources funds in Hillbent-4-ETF’s monthly and quarterly decision support research. CUT has a management expense ratio @ 0.52% and currently yields a 1.68% dividend return.)

The Gulf region’s hurricanes combined with California’s recent wildfires has wrought billions of dollars of property damage and destruction. The rapid increase in the price of lumber futures is correlated to both of these natural disasters. Add to this equation duties imposed on Canadian exports, such as lumber, by the Trump administration and the underlying fundamentals supporting increased prices become even stronger.

So, that’s the rear view mirror of the lumber market. However, what concerns me more is its market direction going forward. Technically, it has broken out above key resistance levels and approaching a key historical resistance level. Below is a monthly chart which depicts a consistent  series of market corrections whenever lumber approaches historically high levels. I am not calling for an outright short on the softs’ commodity yet, but, given these lofty levels and the fact that we are coming into the seasonally slower winter season for builders, demand should taper off and favor more the probability of bearish price action.

 

monthly chart lumber futures november 2017 contract
Click to enlarge

 

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