McClellan Chart in Focus: Lumber Gets Its Mojo Back – By Tom McClellan

 
Chart In Focus

Back on March 22, I wrote here about how the price of lumber had lost its ability to correctly foretell several economic data series which tend to follow in lumber’s footsteps.  The big blowoff move up to the May 2018 top at 639, where lumber stayed for about a nanosecond, has not been getting replicated in the other data related to housing.  My explanation of this is that it was not a pure supply/demand event, with messaging about what lies ahead for the other data series.  It was, instead, a speculative blowoff move, spurred by the U.S. tariffs on Canadian softwood lumber which sent lumber consumers (e.g. big homebuilding companies) scrambling to lock in pricing and supply availability.

This week’s chart reveals how that exogenous effect may be starting to get back to normal again.  The movements of lumber futures prices tend to lead corresponding movements in the PHLX Housing Sector Index (HGX), but with a lag time of about 55 trading days.  This relationship did not work so well in 2018, as lumber prices had been making the big blowoff up move and the corresponding collapse.  But the relationship appears to be getting back into sync again now.

More data is always better for understanding market relationships, and the additional price data we have gotten lately shows what was really going in between these two.  The leading indication relationship went off the rails at the point when lumber prices went up above about the 450 level, en route to that top at 639.  The 450 level appears to be the threshold where lumber’s message about strength or weakness in the economy reached a breaking point, and instead the high price of lumber started having an opposite meaning.  It meant that housing related companies (and their stocks) were going to suffer because lumber was just too darned expensive.  It was not a sign of economic strength when it was above 450, but rather of a significant constraint on the economy, or at least on how the economy is reflected by the housing market stocks.

Now that lumber is back down below 450, the relationship is starting to work again.  And that is relevant right now because just over 55 trading days ago, lumber prices were topping at just below the 450 level.  So if the leading indication is working again now, that should mean an imminent top for the HGX, and then a decline lasting for the next 2+ months. 

The HGX Index has had a nice rise in 2019, rallying now 35% off of its Dec. 24, 2018 low.  But if lumber is back to being right again about where housing stocks are headed, the next few months are not going to be as pleasant for that sector.

Tom McClellan
Editor, The McClellan Market Report

Related Charts

Mar 22, 2019

How Lumber Lost Its Mojo as Economic Indicator
May 24, 2018

A Fresh Look at Lumber and Housing Stocks
Nov 19, 2015

Housing Starts – Lumber’s Message
 

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.