Why Lumber Trader Stinson Dean Says the Great Short Squeeze Is Over

(Bloomberg) -- In case you’ve missed it, lumber has been on a five-day losing streak. After an incredible run that’s captured national attention, it’s the longest selloff since the very beginning of the year.

And at least one lumber trader thinks the great squeeze is over. On Twitter earlier, Stinson Dean (a previous Odd Lots guest) tweeted: “That’s it. I’ve seen enough. Lumber squeeze of 2021 is over. I think cash will follow soon. Where’s the floor?”

Just to back up for a second, Dean’s earlier argument was that the runup that we saw was a de facto short squeeze … that all of these lumber yards had made commitments to homebuilders, but then the market proved to be much more tight than they were expecting, forcing them to buy at any price in order to meet their obligations to customers.

I talked to him by phone this afternoon, and he says in the last few weeks there’s been a behavioral shift on the part of buyers that signals the squeeze is over. 

"When I started seeing the industry buying, ahead of time for summer, that was kind of ahead of time for summer, that was a behavioral change,” he said. “That started happening the past four or five weeks… Folks changed their philosophy from just in time, hand to mouth, to anticipatory purchasing. Trying to get long."

Furthermore, you can see it in the futures, he notes. "Four or five weeks in a row, the CFTC report, showed commercial hedgers lifting shorts and adding longs,” said Dean

The bottom line is not that prices can’t go back up to their old highs, but that commercial players aren’t short anymore, either in terms of their inventory or their position in the futures market. He called it a “complete change in behavior” from earlier this year, adding that “for the next five weeks, we’re going to see a lot of selling pressure.” 

There’s another dynamic. It’s his sense, just from talking to other traders, that the big box retailers (Home Depot, Loews, etc.) have plenty of inventory now and he expects them to reduce buying in the future, freeing up more wood for the commercial market, which should ease the strain further.

Separately to all this, Neil Dutta of Renaissance Macro points out that lumber production continues to rise, so the supply side is kicking into gear as well, another factor that should ease the strain.

For more lumber commentary, definitely follow Stinson Dean on Twitter here.

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