Lumber: Construction Indicator That Implies Future Global Weakness

The cycle of accumulation and distribution defines cause building within a broader mark down phase for random length lumber.

Lumber, a leading indicator of domestic and global construction, implies future weakness not only US home construction but also the global economy. The general observation of mark down across the commodity sector despite numerous countertrend rallies suggests deflationary forces and deflation throughout the global economy. This interpretation will gain acceptance when the business cycle transitions from prosperity to liquidation and the public loses money on the expectation that it can be prevented or managed.

Price

A negative long-term trend oscillator (LTCO) defines a down impulse from 272.60 to 261 since the second week of July (chart 1). The bears control the trend until reversed by a bullish crossover. Compression, highlighted by white circles, generally anticipates change.

A close above 293.10 jumps the creek and transitions the trend from cause to mark up. A close below 223.70 breaks the ice and returns the trend to mark down.

Lumber's trend, a comparison of down (red boxes) versus up (green boxes) impulses, defines a trending market and a source of profit for bears since 2012.

Chart 1

Leverage

A positive long-term leverage oscillator (LTLO) defines an up impulse and bear phase since the second week of August (chart 2). This supports the decline (see price).

A diffusion index (DI) of -12% defines Q2 accumulation (chart 3). A capitulation index (CAP) of 44% supports this message (chart 4). DI and CAP's trends, broader flows of leverage and sentiment from extreme accumulation (green dotted line) to distribution and extreme fear (green dotted line) to complacency supporting the bulls (red arrows), should not only continue to extreme concentrations but also restrain downside expectations until reversed (see price).

Continuation of the decline within these trends represents a SOW.

Chart 2

Chart 3

Chart 4

Time/Cycle

The 5-year seasonal cycle defines strength until the end of the year (chart 5). This path of least resistance restrains downside expectations (see price).

Chart 5