US equity markets sold off a bit in Tuesday’s session ahead of today’s FOMC statement. What is your plan?
The Debate Over Growth Versus Value Stocks
Major US equity indices traded lower ahead of the Fed meeting, and the debate over growth versus value stocks continues. Is there any magic language or policy stance that can come out of today’s Fed meeting to provide clarity in this market?
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
PPI data came out stronger than expected yesterday. This data adds more fuel to the inflationary theme, while Retail Sales were weak. The markets should have been lower from this data, and they were, albeit slightly.
As the anticipation builds to today’s FOMC statement at 2:00 PM ET today and the subsequent press conference at 2:30 PM ET, it seems like a good time to revisit a market that we are following - lumber .
If you have been following along and read the June 9th publication , you know that we are eyeballing the lumber markets for an ETF trade possibility. While the lumber market has been just insane to the upside in 2021, it has recently pulled back substantially. The question remains: are these higher lumber prices sustainable? If so, is there a way to participate via an ETF?
The Lumber Futures
While this may seem like an obscure sector or at least an underappreciated one, let’s take a look at the front-month lumber futures to get caught up on the most recent price action.
Figure 1 - Random Length Lumber Futures Continuous Contract February 21, 2020 - June 15, 2021 Daily Source stooq.com
Front-month lumber futures made a pandemic low of 251.50 on April 1, 2020. Its recent and all-time high is 1733.30, which was put in on May 10, 2021. Taking a 50% retracement of this move, we have a value of 992.40. Yesterday’s low in front-month lumber futures was 943.70 and a close of 1009.90. Yesterday’s trading was also on higher than average volume. It is important to note that it traded below the psychologically important level of 1000, through the 50% Fibonacci retracement, and then reversed intraday and closed higher. This kind of price action really gets me going.
Let’s also illustrate this price action described above via weekly candlesticks:
Figure 2 - LBS1! Random Length Lumber Futures Continuous Contract September 2019 - June 2021 Weekly Candles Source tradingview.com
A Suggestion Against Lumber
Isn’t that something? I wanted to illustrate this via the weekly candlesticks to add a little more clarity. The weekly candlestick that is being formed this week could be a sign of things to come. Now before we go any further:
I strongly suggest against trading in Lumber Futures. They can be illiquid, and experience many limit up and limit down days. You could be stuck in a losing position and not be able to get out. The only traders in Lumber futures should be hedgers that are in the wood business or deep pocket institutional traders that have real money to burn. Futures trading entails unlimited risk. I am sure that many fortunes have been made, and many more have been lost during this insane lumber market. Being on the wrong side of a futures market like Lumber can be brutal.
Lumber is a very thin contract and may only trade a few hundred contracts per day. But with such intriguing technicals, I want to circle back to an ETF that we covered in the June 9th publication : WOOD iShares Global Timber & Forestry ETF.
Figure 3 - iShares Global Timber & Forestry ETF (WOOD) Daily Candles November 10, 2020 - June 15, 2021. Source stockcharts.com
So, we see some interesting potential weekly candlestick formation in the Lumber futures and an interesting daily candle in WOOD. While the 2 instruments do not trade a perfect or near-perfect correlation, a correlation exists.
I like the idea of getting long the WOOD ETF based on the action in the Lumber futures markets.
While trying to catch a falling knife can be a precarious proposition, I view this as buying a pullback in a bull market. While we discussed certain levels in the June 9th publication , I would like to explore some different levels and a potential scaling/tranche entry strategy today.
And, while the price of gold certainly hasn’t caught an inflation bid (at least not yet), this could be a wooden opportunity. Maybe a wooden opportunity is the new golden opportunity.
Now, for our premium subscribers, let's look to pinpoint potential entry levels in WOOD , and recap the eight other markets that we are covering. Not a Premium subscriber yet? Go Premium and receive my Stock Trading Alerts that include the full analysis and key price levels.
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Sunshine Profits: Effective Investment through Diligence & Care
This content is for informational and analytical purposes only. All essays, research, and information found above represent analyses and opinions of Rafael Zorabedian, and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. You should not construe any such information or other material as investment, financial, or other advice. Nothing contained in this article constitutes a recommendation, endorsement to buy or sell any security or futures contract. Any references to any particular securities or futures contracts are for example and informational purposes only. Seek a licensed professional for investment advice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Information is from sources believed to be reliable; but its accuracy, completeness, and interpretation are not guaranteed. Although the information provided above is based on careful research and sources that are believed to be accurate, Rafael Zorabedian, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. Mr. Zorabedian is not a Registered Investment Advisor. By reading Rafael Zorabedian’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Trading, including technical trading, is speculative and high-risk. There is a substantial risk of loss involved in trading, and it is not suitable for everyone. Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment when trading futures, foreign currencies, margined securities, shorting securities, and trading options. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Rafael Zorabedian, Sunshine Profits' employees, affiliates, as well as members of their families may have a short or long position in any securities, futures contracts, options or other financial instruments including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice. Past performance is not indicative of future results. There is a risk of loss in trading.