Since the pandemic started, the price of lumber had a spectacular run. It was an extremely volatile price action as for instance, in 2021, lumber price doubled between January and May when it peaked at 1750 USD. What to expect from the lumber price going forward? Note that this is an important question to ask just because lumber is a LEADING INDICATOR for markets and risk. We are primarily not interested in trading or investing in lumber. We are really interested in lumber’s price action as a signal to forecast risk appetite in markets which we may use in our stock investing service.
The sharp increase in price was driven by a strong demand for building material, an increased demand for single units, increased demand for home improvements during lockdowns, supply chain disruptions, US softwoods tariffs on Canadian lumber and the list goes on.
Moving Forward, Will Lumber Price Continue to Climb?
We believe that lumber price is about to take a breather and probably slide lower. This is based on both Fundamentals and price analysis.
From a fundamental perspective, new home sales were at their lowest level in April 2022. This is the lowest they have been in the last 2 years. The month over month drop of 16% in April 2022 doesn’t bode well for lumber price.
We also have an environment of increasing interest rates and increased building costs due not only to the increased cost in materials but also in labor. This type of environment typically puts a strain on buyers’ affordability, further reducing the demand for new constructions. You can see how the payment as a % of income is at 20% now and we expect it to raise further.
The Price Action Based on The Chart
The chart below is a long term monthly chart and shows the following:
- A possible head and shoulders top was set.
- The pullback is not done yet and lumber price can still fall lower. Best case scenario, the price back tests the previous support at 415. If that level doesn’t hold, we can see it fall to 300 USD.
- Above 650 USD, lumber might continue rising to retest recent highs.
All in all, lumber price rolling over or stabilizing at current levels signals that inflationary pressure could be easing up as detailed in our recent analysis of where inflation is heading in 2022 and how the June 2022 candle will be an important one to watch.
To put things in perspective, our analysis shows that while most commodities might look toppy, some select ones like silver and potentially gold might still outperform. We covered how Silver is still Bullish here and gold is still on track to reach $2500 here.
Written by hdcharting, reviewed by Taki Tsaklanos
