The crowd can't be wrong 100% of the time...
Normally, we want to position ourselves opposite the popular trade. But in some cases, the winds are too strong to ignore.
Everyone feels them and bets accordingly. Then, the market plays out as expected. We don't want to argue when it does.
That's why the trend is so important. We want to take contrarian positions wherever we can... but only when the trend is in our favor.
Today, one beaten-down asset has more bets against it than at any time in the last two years. But according to the trend – and history – we can expect more downside before a major bottom.
Let me explain...
Lumber has been on a wild ride. This commodity's incredible volatility was one of the pandemic's big financial stories.
Lumber prices skyrocketed about 459% from their April 2020 low to their May 2021 peak. That was driven by a surge of "do it yourself" projects during quarantine... supply-chain issues... and a screaming-hot housing market.
Since then, the commodity has crashed nearly 75%... nearly tripled after that... and crashed by 50%-plus after that. Again, the volatility has been incredible.
In total, lumber is down 59% since last year's peak. And a record number of traders are betting it will fall further.
We can see these bets in the Commitment of Traders ("COT") report. This report tells us what futures traders are doing with their money. And when these folks all pile into a trade, losses usually follow.
Recently, bearish bets against lumber hit a two-year high (marked by the lows on the chart below). Take a look...
We'd normally take this as a contrarian signal. The COT says that bets against lumber are piling up. So the smart move would be to make the opposite bet, right?
Well, things aren't so simple this time around...
Since 1995, bets against lumber hit a new two-year high on three other occasions. And they didn't cause spikes in prices. In fact, the opposite happened. Take a look...
Lumber prices typically hold steady. They've been appreciating 2% a year since 1995, roughly keeping up with inflation.
But prices fell significantly after setups like today's. They were down 16% in three months, 10% in six months, and 16% in a year.
Again, we're looking at a small data set of just three instances. So we don't want to draw any sweeping conclusions about where lumber will go from here. (It's likely not at the top of investors' minds, either.)
Still, you might not want to bet on lumber simply because it's the contrarian move right now. History shows prices could fall further before today's contrarian setup turns into a buying opportunity.
Good investing,
Sean Michael Cummings
Further Reading
"This cycle of fear and greed drives sentiment in the markets," Brett Eversole writes. Right now, one precious metal is hated. Futures traders want nothing to do with it. But this time, it means a rally could be on the horizon... Read more here.
A specific group of stocks has staged a big rally in recent weeks. This could be the start of a new uptrend – the most important piece of our investment philosophy. And if that's the case, it could mean impressive outperformance in the coming months... Learn more here.
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
Northrop Grumman (NOC)... "offense" contractor
Huntington Ingalls Industries (HII)... military ships
C.H. Robinson Worldwide (CHRW)... shipping technology
ON Semiconductor (ON)... semiconductors
Sarepta Therapeutics (SRPT)... biopharmaceuticals
Acadia Healthcare (ACHC)... behavioral health
Hershey (HSY)... "Global Elite" chocolatier
General Mills (GIS)... food products
CF Industries (CF)... fertilizer products
Quanta Services (PWR)... infrastructure services
Equinor (EQNR)... petroleum
Occidental Petroleum (OXY)... oil and gas
Chesapeake Energy (CHK)... oil and gas
Cheniere Energy (LNG)... natural gas
New Fortress Energy (NFE)... utilities
NEW LOWS OF NOTE LAST WEEK
Intel (INTC)... chipmaker
Verizon Communications (VZ)... telecom
Match Group (MTCH)... online dating
Enstar (ESGR)... insurance
Sanofi (SNY)... pharmaceuticals
AMC Entertainment (AMC)... movie theaters
Nordstrom (JWN)... "death of retail"
Mohawk Industries (MHK)... flooring
Sturm, Ruger (RGR)... guns
