“Chaotic”...the Perfect January Tag
If there was ever any doubt as to what we should expect from January Chaos, 2022 is a textbook example. Traders (buyers and sellers) enter the month with new year expectations that either repeat or improve upon the previous year. These intentions are pre-empted by either an inventory liquidation or accumulation, which is most directly influenced by the emotions carried into the new year. Regardless of what that position is, January becomes perplexing. Traders who have taken aggressive inventory positions pause to consider whether or not they were overly ambitious. Those who have had a more tepid approach look for signs that will inspire them to change or hold a lighter inventory position. The chaos usually begins the second week of the month and only lasts a couple of weeks.
Traders have a mental checklist which I suggest be written down and reviewed to monitor weekly changes. That list will include both supply and demand factors, looking for new disruptions or changes to existing conditions.
January Chaos is the most difficult time to make rational decisions since the period is littered with constantly changing market opinions, which lead to irrational actions. Buyers, regardless of positions, look for price softness when winter weather turns extreme. Procrastinators hope for relief, and speculators look to add to positions during the winter confusion.
The entire buy side of the market is seeking opportunity to increase inventory. There is typically an underlying pent-up demand that must be covered. Only a very minor few lumber handlers enter mid-January with what they consider to be an overbought condition... regardless of price or despite any disruption potential of any kind.
Over the past 22 years, January has ended the month higher than it began 85% of the time and February has finished higher 91% of the time.
The Make-Up of Winter 2022
Let’s summarize what the participants of our lumber market are contending with and what is to come.
Supply: Lower production from western Canada is a factor not fully embraced by consumers. What they see are mixed signals. One day there are minimal open market offerings, then another there are reports of 500 cars being sold. The largest producers seemingly team up with the largest retail chains and contractor yards to assure supply. All other species are making up the one billion board foot SPF-W supply reduction, however not immediately. There is a lag time of 6–12 more months to catch up. Builders have been covering 3–6 month needs for the past three months as a preemptive move. Spring of 2022 has been prebought, which is much different than overbought. Overbought infers unsold speculation. Prebought infers buying to cover orders in hand. The further out those months’ ahead orders are negotiated, the more we are robbing from the future.
Demand remains robust with both custom and production builders, as does DIY. All consuming sectors of lumber are at maximum capacity and showing chinks in the armor.
Transportation, rail and truck is a critical bottleneck causing buyers to double buy from regional reloads and DCs. There is no relief in the near term. The solution will be inventory accumulation to the point of buyers becoming overbought.
I expect this prebought action is April’s rally brought forward. This scenario sets up February’s rally into week #10 as the 2022 reversal high.
Supply disruptions, Covid, and labor will improve by Q2.
Looking Forward...ML
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