By David P. Moore
Though most major news outlets seem to disagree, the "housing bubble" is yesterday's news. Not to say it's unimportant: Rising mortgage rates and plummeting home values are two very tangible symptoms of the same huge credit expansion behind the burgeoning U.S. trade deficit (and practically every other notable trend in finance).
Yet you may be more likely to find today's best housing-related opportunity in commodity futures than in debt or real estate markets. As the most recent issue of Monthly Futures Junctures reveals, it's the trend in Lumber prices that should to be tomorrow's news.
Frankly though, whether the pending move makes headlines matters a lot less than whether the Elliott wave patterns in Lumber continue to unfold according to the most likely scenario. At times, it's hard to see how they couldn't: The variety and amount of technical support in favor of this forecast is staggering.
Throughout the rally in housing prices and the torrid trends in homebuilding, Lumber prices didn't exactly fall in line with conventional wisdom. During the entire boom – from the end of the S&L crisis in the early 1990s onward – lumber moved sideways, bouncing back and forth within a well-defined and ever-tapering range.
To describe this situation in Elliott's terms, during that period Lumber prices have traced out a "contracting triangle" corrective pattern. As with all corrections, this one should give way to an impulsive resolution. While that impulse ought not take the same matter of decades to unfold as the correction, the triangle's long duration does give an idea of the scope we're dealing with:
Now factor in simultaneous extremes in sentiment that this market sees only once ever several years, both in Commitment of Traders (COT) data and according to the Daily Sentiment Index (DSI). You begin to get an idea of how long Monthly Futures Junctures editor Jeffrey Kennedy has been waiting for this opportunity to mature – and how ripe it appears now that it has arrived.
All that said, few markets are as one-sided as they may seem at first. And especially in a situation like this one, it's critical to look for cracks and develop a fallback plan. Hence Jeffrey's closing words regarding Lumber's Elliott wave pattern in the January issue of Monthly Futures Junctures:
"It is possible that I might be premature in identifying the end of this multi-year pattern. Prices simply haven't [moved] far enough in an impulsive manner off the [recent extreme] to be certain. Even so, whether from current levels or following one more last-gasp push, the evidence is mounting to suggest that 2007 will be a pivotal year for one side of the Lumber market."