Astute traders have likely noticed an interesting divergence between the spot price of random-length lumber and the share prices of the major publicly traded timber companies. From the chart below, you’ll notice that the spot futures price of the lumber continuous contract has fallen by 11% since February relative to the 9.30%, 9.26% and 7.89% increases by Plum Creek Timber Co. Inc. REIT (PCL), Rayonier INC. REIT (RYN) and Weyerhaeuser Co. (WY), respectively. In the article below we’ll take a closer look at these timber stocks and analyze how falling timber prices will likely influence their share prices in the months ahead.
A Look At Lumber Prices
Lumber prices have been under pressure since early May. Unfortunately for the bulls, the death cross – where the 50-day moving average crossed below the 200-day moving average back in April – has signaled the beginning of a long-term downtrend. The recent close below the swing low of $321.30 suggests that the selling pressure will likely continue in the weeks ahead and perhaps even intensify. Many traders will expect falling lumber prices to negatively impact the profitability and margins of the major timber companies despite recent positive news of an increase in housing starts. The weakness in the underlying commodity should be noted by any trader interested in trading on economic releases related to the housing market. (For more, see Timber Investments Cut Down Portfolio Risk and for more on trading the death cross see How To Trade The Death Cross On Oil.)
Timber Stocks Moving Against The Trend
Weyerhaeuser is one of the largest publicly traded commodity companies in the world. The company grows, harvests and manufactures forest-related products worldwide and is the dominant player in the industry. With a market capitalization of more than $18 billion, strong moves in lumber prices, shifts in housing trends and general supply and demand changes can have a drastic impact on the movement of its share price. As you can see from the chart below, traders are comfortable to ignore short-term declines in the underlying commodity in favor of positive housing market information. From a technical perspective, the 200-day moving average has propped up the price over the past 12 months and the recent economic news has sent the price higher. However, given the weak chart of lumber prices, it may be prudent for bullish traders to tighten their stop-loss orders. One possible area of interest will be the nearby swing low of $29.70.
Plum Creek Timber is another major player. The trust owns and manages timberlands in the U.S. and its products include lumber, plywood, fiberboard and related products. Unlike Weyerhaeuser, Plum Creek's 200-day moving average has acted as a strong area of resistance over the past twelve months. Notice how the price bounced off the major moving averages on each attempt since December. The recent move above the 200-day moving average is a bullish development and has caught the attention of long-term position traders. However, given the weakness in the underlying commodity, this move should be watched very closely. Any move back below the 200-day moving average could indicate that the long-term downtrend will continue.
Mid-cap timber company Rayonier Inc. has the weakest chart; bullish traders should proceed with caution. Its shares are trading at their 200-day moving average, and recent price action suggests that bulls will have trouble overcoming resistance at this level. It wouldn’t be surprising to see the price bounce off this area and start to make a short-term move lower.
The Bottom Line
Divergence between the share price of major timber companies and the spot futures price of the lumber continuous contract suggests that bulls should proceed with extreme caution. Strong news regarding housing starts has caused the prices of the timber stocks to increase, but falling lumber prices could start to impact margins and profitability, and as a result, share prices. (For more on this topic, check out Commodities: Lumber.)