An Outlook for Lumber and Lumber Stocks
If the price of lumber rises, will investors take notice? Lumber prices are in a long term downtrend and currently are 26% below May 2006 levels. They are exceptionally volatile and not followed closely by most investors. Yet, they are intriguing to investors who follow seasonal patterns.
Once again, price volatility has been exceptional this year. Lumber prices fell almost 44% between April and June. Technicals have since rebounded from severely oversold levels and moving averages are now turning strongly positive. Since their lows in June, lumber prices have gained 30% in part due to depreciation of the U.S. Dollar.
The period of seasonal strength for the forest product industry is from the middle of October to the end of April. The industry has gained an average of 8.4% per period during the past 10 periods. The trade has been profitable in eight of the past 10 periods. A sweet spot exists within the period of seasonal strength when most of the gain is realized. The sweet spot is from the end of October to the beginning of January. The forest product industry has gained an average of 6.5% per period during the past 10 sweet spots. The trade has been profitable in all ten of the past ten periods. The buy and hold return for the past 10 years was a loss of 39.3%.
The reason for seasonal strength is increasing demand for lumber prior to a peak in the spring home building season. Major lumber suppliers such as Home Depot and Lowes place larger orders and receive delivery of more lumber during this period than during other times of the year in anticipation of new home construction as well as home renovations. Ironically, the recently announced freeze in home foreclosures by some of the largest banks in the U.S. could help the U.S. home building industry between now and next spring. Home buyers will be more inclined to buy an unencumbered new home than to buy an existing foreclosed home with time consuming and costly legal issues.
The outlook for lumber prices during the current period of seasonal strength is encouraging. Existing Home Sales, Housing Starts and New Home Sales bottomed in the month of July following culmination of the U.S. Homebuyer tax credit. Since then, the housing market slowly has stabilized. Housing reports over the next two weeks will confirm whether or not the bottom is intact. In addition, demand for lumber from China is growing.
The preferred way to invest during the period of seasonal strength is through Canadian lumber, plywood and oriented strand producer stocks such as Canfor (CFP), Interfor (IFP/A) and West Fraser Timber (WFT). All have a history of positive seasonal strength from the middle of October to the end of April. All are showing intermediate technical signs of bottoming.
Jon and Don Vialoux are authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow us on Twitter: @EquityClock
Lumber Futures (LB) Seasonal Chart
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