The lumber futures market is a pretty thin market, with only around 3,000 contracts open. Compare that to the eMini SP500 futures contract, which has 2.6 million contracts open. In lumber futures, a single small order can move the market. So anyone who decides he wants to trade lumber futures better know what he is getting into.
We have seen an amazing blowoff in lumber futures prices recently, with the May contract rising for 15 straight days recently. That string was part of a larger up move that saw 22 out of 23 up days, and 57% price rise from the March 16 low. Rising housing demand, and remodeling demand for everyone’s Covid home office, means higher demand for 2x4s and plywood, pushing up spot lumber prices. Contractors have reportedly amplified that by stockpiling supplies ahead of future projects, and that stockpiling has helped to drive up prices.
All blowoff price tops eventually exhaust themselves, and this one will too. It may have already done so, with the key reversal day (outside price bar, and down close, to reverse the prior trend) on April 20.
As all of this has been happening, there has been a curious development in the lumber futures market. Total open interest (i.e. the number of active futures contracts) has been declining. Normally, open interest will rise and fall with lumber prices. They usually move together. So in the rare occasion like this where we see prices rise and open interest fall, that is usually a very important message.
The lumber futures market is not agreeing with the price rise which the traders in this market are themselves undertaking. If this was a legitimate up move for lumber futures prices, then we should expect to see open interest rising along with prices. Instead, the lower open interest numbers are saying that the up move in prices is not legitimate, and should reverse itself. A couple of other episodes are highlighted in the chart above. The implication is that lumber prices are not going to be able to sustain this up move.
One more point to know about lumber prices: when there is a blowoff top, the slope upward is usually symmetrical to the slope downward.
Editor, The McClellan Market Report