From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Whether you trade commodities or not, it’s been impossible to ignore the recent sell-off in Lumber, as prices have collapsed almost 30% in just the last month.
We pointed out in May that Lumber was due for a digestion of its recent gains.
Well, let’s just say we got a lot more than that! Sometimes markets correct or consolidate through time, and sometimes they correct through price.
And Lumber is most definitely correcting through price!
But Lumber is not the only procyclical commodity to enter a corrective phase. More recently, DR. Copper has begun to digest its recent gains through price as well.
These corrections have already done some damage to the primary uptrends at play as both of these economically sensitive commodities have recently violated critical support levels.
Another point we raised last month was that many risk-on commodities were hitting their upside objectives, and/or running into resistance at key prior highs or other logical levels of supply.
These observations still stand true today as evidence continues to mount and suggest that these messy markets aren’t likely to go away anytime soon.
Now let’s dive into these two commodities and use them to illustrate the type of environment risk assets are currently in. First up is a chart of Lumber: The rally in Lumber has been the epitome of a face ripper, peaking near 1,710 after trading as low as 250 in late March 2020.
Do you remember when social media was full of people taking selfies atop stacks of lumber? That was good fun!
But that’s over now… There are no more pics of 2x4s, given lumber’s price has been nearly cut in half in the time since, as it currently trades back below 900.
One of the old adages within the commodity markets is, “what goes up, must come down.”
Lumber has been a picture-perfect example of just this lately.
And it’s not alone… Copper has now begun to roll over in a similar fashion, following Lumber’s lead.
Here’s the weekly chart of Copper futures: After breaking to new all-time highs, Copper quickly failed and reversed back below the former 2011 highs near 4.65. The quick reversal after breaking above our upside target is eerily similar to the recent peak in Lumber.
You know what they say…
From failed moves, come fast moves
As long as Copper is below 4.65, our outlook is neutral over the near term, and we are expecting continued corrective action.
But what does this mean for commodities and risk assets as a whole?
Messier for longer!
Two of the most critical risk-on commodities have begun to correct, and do so in a very meaningful way. We believe it would be prudent to pay close attention to these charts in the weeks ahead as they should be full of information and insight.
Most Base Metals and other procyclical commodities remain below significant areas of overhead supply.
And the classic risk-on barometer in the currency market, AUD/JPY, finally resolved lower from a tight 12-week consolidation.
All of these developments suggest that risk has switched to off mode. Rember, NO position IS a position.
Cash, Bonds, and patience have served us well over the past few months, and it looks like this approach will continue to for the foreseeable future.
That’s our take!
As always, let us know what you think about this. We love hearing from you.
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