What lumber and gold prices tell us about the stock market’s next move

Commodities have an effect on stocks but the one to watch is platinum.

Lumber prices have experienced one of their biggest and quickest plunges in history— with the spot futures contract dropping more than $670, or 40%, in just 25 trading sessions.

It’s human nature to try to find meaning in this, since the alternative is to accept that price changes this momentous are nothing more than merely random fluctuations. None of us like to accept that our investment portfolios could be subject to such cruel twists of fate.

One way in which some are finding meaning in lumber’s decline is via a market-timing indicator based on the ratio of lumber to gold One study found that when the ratio is higher than where it was 13 weeks previously, conditions should be favorable for U.S. stocks. When it’s lower, U.S. Treasury bonds are preferred.

Not surprisingly, given lumber’s recent plunge, this ratio’s current message is bearish for stocks. (See chart below.) To help determine how much weight to place on that message, I tested the ratio back to 1984 — which is how far back data extend on FactSet. For each week since then, I calculated whether the ratio was higher or lower than where it was 13 weeks previously.