The price of lumber on the stock exchange has been rising since April 2020. However, during this period, the price of these standardized derivatives (futures) was traded at $ 261, which was the bottom. Currently, a year later in May, it reached a record appreciation of up to 1700 USD. However, it is currently facing a relatively sharp drop of about 40% since its peak in May. The price thus begins to stabilize. #Lumber and inflation
Economists and investors wondered whether the high prices of wood products would put an end to the boom in home construction in the United States. Builders logically increased house prices, due to higher construction timber costs (which experienced several times the price increase), and many stopped selling houses before the finalization of buildings to "misjudge" input price changes and not sell too cheaply.
Lumber is also referred to as a leading indicator of inflation. At this point, investors could not determine whether the rise in commodity prices and the impact of fiscal and monetary policy would cause a permanent increase in the price level or whether it was only a temporary increase due to the above factors. Below you can compare the development for 2020, 2021 and the price average 2015-2019. Currently, the price is significantly above the standard movement.
The sharp decline indicates a bubble that has burst, and the question is how low wood prices will fall. Even after a sharp fall, the price for this commodity remains almost three times higher than the current standard, which is typical for this time of year. Manufacturers and timber traders expect prices to remain relatively high due to a strong housing market, but to reduce supply bottlenecks and insane purchases of furniture, homes and other wood products, which have characterized the reopening of the economy and caused significant price increases. Timber producers argue that prices should remain relatively high as domestic workers try to make up for the country's housing deficit. Mortgage-backing company Freddie Mac estimated in April that there were about 3.8 million homes in the United States that were avoiding meeting demand, mainly due to a lack of construction following the 2008 housing crash (WSJ).
From a short-term statistical point of view, we can see on the daily chart that the market has been declining very sharply in recent weeks. This is also indicated by an indicator that measures the distance of the price from the EMA 50 (exponential moving average over 50 days). According to him, from a short-term point of view, timber is very oversold and a correction upwards can be expected. The market is also attacked by the EMA 200. Just below the current price, there is strong support, in the red zone. Purchasing activity could be significantly increased in this zone.
From a statistical point of view, the weekly chart makes a logical and necessary correction, after long weeks of growth. The timber market has been growing for 8 consecutive weeks, which can be considered a very strong extreme for building short positions. Currently, the market is declining for 4 weeks, which is quite logical after this growth. In this case, it is a non-standard situation, but it cannot be said that this is a complete extreme. Although even at this point there is a high chance that we will see 1-2 green candles on the weekly chart after 4 weeks of decline, we do not yet record a significant extreme. This would occur if the market were red for 5-6 weeks.
In the following histogram below, we can see the distribution of revenues on a weekly basis from 2010. In recent weeks, we have long been on the right. However, as the market declines in recent weeks and since its peak has lost more than 45% in about 6 weeks. We also have here the relative probabilities that can be expected for each week. The fact that the market will do more than 0% (will be positive) to 10% is a probability of 44.8%. However, this can be expected without extremes. As the market is declining for 4 consecutive weeks, the probability of growth in the next week will be significantly higher, and if we see a decline in the 5th week, the expected growth in the 6th week should be very likely.
Finally, we add the average gains for individual months since 2010. Here we can see that May is the most negative month and that seasonality plays a big role, especially in December, January and February. June is usually a statistically quite positive month.