Sideways trends have started to dominate global financial markets. Chart patterns on the market leaders within some of the dominant sectors such as biotech and technology are being touted by many as proof that the days of trending markets are over. However, one segment that seems to be countering this thesis is the timber-related companies across the globe. In this article, we take a look at the charts and try to determine how active traders will position themselves to profit from the resumption of the powerful uptrend. (For more, see: Timber Investments Cut Down Portfolio Risk.)
One of the most widely followed exchange-traded funds (ETFs) by retail investors seeking exposure to the global timber and forestry market is the iShares Global Timber & Forestry ETF. More specifically, as the name suggests, this fund comprises companies from around the world that produce forest products, agricultural products, and paper and packaging products. Fundamentally, the ETF has total net assets of nearly $550 million and an expense ratio of 0.51%. Taking a look at the chart, you can see that the price is trading a along a well-defined trendline and that it has behaved consistently on each attempted pullback. This is the type of behavior that active traders would expect to continue into the future, and many will likely look to protect their losses by placing stops below either $78.94 or the dotted trendline, depending on risk tolerance. (For further reading, see: Technical Indicators Suggest Opportunity for Forestry Stocks.)
Investors who want to lower the level of company-specific risk provided by the 25 holdings of the WOOD ETF may want to consider taking a look at the PowerShares MSCI Global Timber Portfolio. Like the WOOD ETF, CUT has a global perspective, but it comprises 73 holdings. With similar exposure to the underlying businesses and comparable metrics such as expense ratios, the best choice really comes down to the details such as allocation. Taking a look at the chart, you can see that the fund is trading along a similar trendline to that shown on the chart above. Traders will look use a similar strategy to the one mentioned above, and most will likely look to protect their long positions by placing stops below the trendline or the 200-day moving average, depending on risk tolerance. (See also: Digging into the iShares Global Timber & Forestry ETF.)
One top holding that the funds above share in common is Weyerhaeuser. In case you don't know, Weyerhaeuser has been in business for more than 100 years and is one of the largest private land owners in the United States. Taking a look at the chart below, you can see that the price recently bounced off the support of its 200-day moving average, and the associated momentum has led to a close above a key trendline. While the previous attempt to overcome the resistance near $36 failed after a few trading sessions, the recent breakout and subsequent retest of the trendline suggests that, this time, the move is valid and could be a catalyst for a continued move higher. Traders will likely set their stops below the ascending trendline or 200-day moving average, which are trading near $34. (For more, see: Active Traders Turn Their Attention to Forestry.)
The Bottom Line
Timber and forestry companies are often overlooked due to the nature of their underlying businesses. However, given the sideways momentum that is dominating the equity market, it could be a good time to turn your attention to the stable nature of soft commodities. (For further reading, check out: Finding Portfolio Serenity In the Forest.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.