2012 Could be a Huge Year for ... Lumber?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Glad to be here on Motley Fool. For those unfamiliar with me or my work, my name is Michael Gayed, Chief Investment Strategist of Pension Partners. I write for great sites such as Minyanville, MarketWatch, SeekingAlpha, ETFTrends, and now Motley Fool. Last year, Marc Faber of the Gloom Boom and Doom Report published several pieces of mine in which I argued for a deflation pulse to occur in 2011. I began writing about a coming Summer Crash in June (mainly right through the August and September declines), and then a Fall Melt-Up at the very end of September (partially right through the historic up move in October).
My interests lie less in terms of what I think markets will do, but more in the interpretation of intermarket analysis. The idea behind intermarket analysis is to look internally within and across various asset classes to see what market participants are consciously or subconsciously signaling through relative price movement. I wrote about the idea in early October that Homebuilders (NYSEMKT: XHB) looked ready to substantially outperform, and that was a very bullish sign for equities going forward. 'Lo and behold, Homebuilders have had immense move off of their October lows. Economic data does seem to be improving, there seems to be a tick up in hiring, and record low mortgage rates appear to finally be making somewhat of an impact.
Is it too late to play housing? Maybe, maybe not, but why focus on Housing directly instead of something that, as a knock-on effect, benefits from a pickup in construction? Take a look below at the price ratio of the Guggenheim Timer ETF (NYSEMKT: CUT) relative to the S&P 500 (NYSEMKT: SPY). As a reminder, a rising price ratio means the numerator/CUT is outperforming (up more/down less) the denominator/SPY.
Notice how severely lumber-related stocks underperformed the S&P 500 last year, with a complete and unrelenting downtrend trend taking place since April of last year. Laggards become leaders, and leaders become laggards in what are ever-changing cycles in investor sentiment. Notice the far right of the chart, where it appears as though the ratio is beginning to trend up, with the price ratio above its 20-day (1 trading month) moving average. This suggests that lumber stocks on average may have a strong move higher this year.
This logically should make some sense. If the housing pick up and improvement is real (as it appears it is) and low rates continue to increase the demand for homebuilding, by definition lumber revenues likely rise as a result. And given how substantially the group underperformed, this may be an ideal time to consider a little lumber exposure in your portfolios. After all, if you wouldn't invest now in the group after such a substantial period of weakness, when would you?
The big daddy in the industry is Weyerhaeuser (NYSE: WY), which is the largest holding in the CUT ETF, according to Yahoo Finance. With a dividend yield of more than 3%, there is potential to generate some income and capital appreciation comeback as the group itself comes back into favor. With over 20.5 million acres of forests and a market cap of over $10 billion, it's perhaps the best stock to absorb institutional money in big sums because it can handle more capital than smaller lumber stocks. The stock may get more attention as well given that it's recently crossed its 200-day moving average, which is a plus for technicans following price action. The strength can continue as a lagged response to improvement in housing, and the general leadership that appears to be taking place in the industry. It's a lot easier to invest with the wind at your back, of course.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter.