Sunday, July 26, 2009

Can the price of lumber help predict the S&P 500?

A couple of months ago, our resident financial guru -- 'The Maestro' -- suggested that lumber prices might offer a preview of coming attractions as far as the financial markets are concerned.

...lumber is bulky and therefore requires a huge amount of warehouse space... Unlike steel and copper, lumber has a shelf-life. It is perishable, even if it is stored in excellent condition... Thus, vendors manage their inventories very carefully to avoid spoilage...

Using this suggestion, I overlaid a five-year S&P 500 chart on top of Chicago Mercantile Exchange lumber prices. But I slid the S&P chart to the left by about two years to determine whether lumber could, in fact, predict the future.

The moving average of lumber appears, in fact, to do a decent job of predicting major movements in the S&P 500. But perhaps it's just my imagination.

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