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What Lumber Is Telling Us

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Michael A. Gayed, CFA
Summary

The Fed ended the hiking cycle and already delivered two cuts in 2019.

Lumber, if anything, shows a compelling case supporting equities and the case for further cuts.

With lumber sensitive to the housing market and gold sensitive to implied stock market volatility, when lumber outperforms gold, there’s a tendency for volatility to fall.

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. – Warren Buffett

The Fed ended the hiking cycle and already delivered two cuts in 2019. It did that with the equity markets around all-time highs, and many wonder why the easing is happening, to begin with.

Analysts look left and right trying to find an explanation, but maybe we should look at different parts of the economy to find clues about where the stock market goes next. Lumber ($LUMBER), if anything, shows a compelling case supporting equities and the case for further cuts.

With plunging mortgage interest rates, new home sales advanced sharply. Demand, it seems, is here.

Over the past decade, the price of lumber evolved in a rising trend. It formed the classic higher highs and higher lows series present in any rising market.

What’s even more interesting is the last year’s price action. It seems the market formed a head and shoulders formation with a measured move that points to higher future prices.

Clearing the $420-440 area projects a move to $530 just to confirm the inverse head and shoulder.

Why is this important? As I mentioned in this week’s Lead-Lag Report, one of the things I’m watching is the lumber-gold ratio. Supported by strong consumer spending and a steady housing market, lumber prices are outperforming gold as of late – a bullish sign.

As an intermarket signal, a bearish lumber-gold ratio points to weakness in the equity market. However, the recent developments point to a reversal, implying equities still have legs to move higher.

With lumber sensitive to the housing market and gold sensitive to implied stock market volatility, when lumber outperforms gold, there’s a tendency for volatility to fall and risk assets to have an upward bias.

Add to this the Fed’s easing mode and Trump putting pressure on more cuts as we enter re-election year, and the constructive outlook for lumber may not be just a coincidence.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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