True or False -- The main reason for tumbling LUMBER prices is the crumbling U.S housing market.
According to the mainstream experts, the answer is 100% true. As the demand for houses falls into a bottomless abyss, so plunges the demand for the wood used to build those houses.
There's just one problem with that simple supply-and-demand logic: Lumber prices started falling long BEFORE the housing bubble went bust, as this historical data makes plain:
The five-year long U.S. housing bull did not run out of steam until July 2005, when the S&P 500 Homebuilding Index began to turn down from its all-time peak. From there, various other measures such as existing home sales, new home sales, and housing starts also started to reverse course.
Lumber futures, however, reached their respective peak in August 2004 -- an entire year earlier -- when prices turned down from their highest level in 11 years.
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Flash ahead to today, and the same scenario holds true. Case in point, since January 29, the barrage of bad news coming out of the housing market has been relentless. To wit:
- A Commerce Department report reveals a 45% decline in new home sales from a year ago, the steepest annual drop on record.
- The inventory of unsold homes jumped to 12.9 months in December, an all-time high
- AND, the rate of new construction in the U.S. dropped 45% from year ago levels, to a record low.
YET – from a January 29 low, LUMBER prices have rocketed UP in a powerful rally to three-week highs.
And, one week BEFORE the market's attention-grabbing advance, the January 22 Daily Futures Junctures "Weekly Wrap-up" set the stage for strong gains via the following price chart of lumber: (Some Elliott Wave labels have been removed for this publication)
According to Daily Futures Junctures editor Jeffrey Kennedy's labeling, the dominant wave pattern at large in lumber was a Single Zigzag: A simple three-wave move labeled A-B-C. The subwave sequence is 5-3-5, and the top of wave B is noticeably lower than the start of wave A.
Note the ideal model of a zigzag below:
As Jeffrey's count implies, the countdown to a meaningful bottom in lumber (and subsequent RISE) had begun.
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