(Commodities Weekly) What the Lumber Market is Telling Us 📊🪵

Stock market bulls have been watching the homies like hawks. 

It's a vital industry right now.

Alfonso recently wrote about the Home Construction ETF $ITB breaking to new lows relative to its defensive peer group, the Real Estate ETF $IYR.

He said, "This ratio has historically been a leading indicator for the broader market. During prior cycles, you can see clear divergences where ITB/IYR tops or bottoms ahead of major turns in the S&P 500." 

See the chart for yourself. The data doesn't lie. 

If the equity bull market in the United States is going to continue, this group cannot complete a massive top.

Here's the setup that everyone is watching 👇

The homies are hangin' on by a thread:

As you can see, the iShares U.S. Home Construction Index $ITB has carved out a prolonged potential distribution pattern. 

The index is home to some of the largest homebuilders in the United States, like D.R. Horton $DHI, Lennar $LEN, NVR $NVR, and more.

To quote the great Ron Burgundy, "I don't know how to put this, but I'm kind of a big deal." That's the situation here.

The line in the sand is 97. If it's above, then we think the bull market will continue. If it breaks... look out below!

Lumber futures are sending us mixed messages about the housing market:

Home Construction stocks and Lumber futures have historically traded with a high positive correlation. 

Which makes sense. Very similar fundamentals drive them.

The relationship can sometimes become dislocated, but it has never lasted long.

The biggest question is, who has it right? Is it the futures or the stock market?

Lumber futures are flipping a shelf of former highs into support:

Lumber found resistance at 500 for decades until the level broke in 2020, and the price skyrocketed.

We've been talking nonstop about big base breakouts in commodities like Orange Juice and Coffee, but Lumber has been the leader.

Since peaking in 2021, the price roundtripped to the breakout level and flipped the former resistance into support. 

This is why we zoom out on our charts... The market has price memory!

Here's what's happening now 👇

Lumber futures are trying to climb out of a multi-year base:

After a nasty 75% drawdown, Lumber futures have carved out a textbook bearish-to-bullish reversal pattern.

If the bulls can complete the base, the path of least resistance will shift from sideways to higher for the foreseeable future.

If and when Lumber futures close above 650, we want to be long with a target of 900 and a timeframe of 2-4 months.

Do you trust the Homies or Lumber? Let us know what you think.

Commitment of Traders Highlights

• Commercial hedgers added over 22,000 contracts to their most prominent net-long soybean meal position in the last 3 years.
• Commercials added over 18,000 contracts to their most significant net-long cotton position ever.
• Commercial hedgers added over 35,000 contracts to their largest net-short Japanese yen position ever.

👉 Click here to download the All Star Charts COT Heatmap

Commodities Trade of the Week

This week, we're outlining a $4.2B residential construction company, Cavco Industries $CVCO.

The company is a leading manufacturer of factory-built homes, park model RVs, and modular buildings. 

They're riding the tailwinds of an affordable housing shortage in the U.S., which we expect to persist for years.

We first got bullish on this stock around this time last year when it was challenging a key Fibonacci extension level. 

Since then, it has hit our target and looks poised to continue climbing higher.

Here's how we're trading CVCO: 👇