First it was Doctor Copper. Now it's Lumber.
article I recently wrote
, the focal point was copper, its historical relationship with the
health of the overall world economy, and its currently bearish
chart pattern. The takeaway was that copper has been declining
since 2011, suggesting an economic slowdown and potentially
Commodities are in the midst of a five-year slump. Energy-related
commodities, industrial metals, along with wheat all peaked in
price in 2008, but have yet to revisit those levels.
A Better Leading Indicator?
Copper used to be considered the leading indicator for the world's
economy, but since 2011 its price has fallen even as world stock
Which will prove correct: copper or the equities market? Perhaps
stocks are disconnected with reality, or perhaps fundamentals are
better than copper is suggesting. Either way, mixed signals abound.
Another leading indicator, lumber, is known as the barometer for
the housing market. When lumber prices are in an uptrend, typically
so are housing builds, home prices, etc. Lumber prices have been
very strong over the last five years, having turned up in price in
early 2009 and making new highs recently. This has helped buoy the
homebuilder equities as well.
But that all changed in March.
What about lumber?
If you believe the media headlines, then all is good with the
The latest confidence data shows a big rise from April to May. But
this, along with most fundamental data, is more a coincidence than
leading indicator. It also should be noted that homebuilder
confidence came in at 44, which suggests negative sentiment (any
reading below 50 is considered negative). Oh, by the way, the last
time homebuilder confidence was actually above 50 was April 2006.
We prefer using leading indicators, not coincidental ones.
Lumber has had an extremely strong correlation with housing stocks
as the chart below shows. With a correlation of .90, lumber prices
and homebuilder stocks rise and fall similarly day in and day out.
This extremely correlated relationship likely makes it the better
leading indicator for the homebuilders and equities markets.
There are warning signs now showing up in the lumber market.
Lumber has taken a cue from copper, precious metals
(NYSEARCA:GLTR), and the other commodities, falling over 20% the
last two months. Is this a sign that homebuilders, the housing
market, and the equities market as a whole are finally about to
Looking at the last few months shows the collapse in prices of
lumber. Meanwhile, homebuilder stocks continue upward. The last
time these two highly correlated markets became this disconnected
preceded the 2011 market top that sent stocks down over 20%. How
long will this disconnect last?
Ways to Take Advantage
One market which is closely connected to both commodities and
equities is the US dollar, which has actually shown strength since
the 2008 market lows and more recently since the recent commodities
peak in March.
We were able to take advantage of a rising dollar as commodities
warned of deflation, while dollar sentiment was reaching bearish
levels. Just as the technicals were setting up a high probability
trading opportunity, we wrote on Feb.10:
"The US dollar has already broken out of its downtrend channel and
provides a buy signal in the
PowerShares DB Bullish Fund
(NYSEARCA:UUP) or in the
PowerShares DB 3x Levered Long
How did it work out? That trade was good for a 10% gain in UUPT.
And just when you thought the best was over, another dollar
opportunity outlined may again be on our doorstep.
Lumber may turn out to be the new copper in our consumer and
housing driven economy.
Given lumber's steep decline over the last two months combined with
the many other warning signs we follow, it may be time to get out
of homebuilder stocks as they likely won't stay this disconnected
from lumber prices for long.
Editor's note: This story by
originally appeared on
To read more from ETFguide, see:
Household Debt Down, Margin Debt Up
Are Rising Correlations a Threat to Your
Three Ways Income Investors Get in Trouble