Dear Friends,

The more I look at the US equity markets and compare that to the world of Main Street, the more convinced I am that this nearly vertical rally in the equities is the result of funny money plowing into stocks which has little significance to the average citizen on the street who is trying to figure out why the stock market is saying things are so rosy when everything around him tells him that the truth is quite a different story.

Even in the commodity markets, index fund buying has become indiscriminate as they hurl huge sums of money into commodities across the board irrespective of any fundamental realities in those markets. Many markets are nothing but US Dollar plays with the weaker Dollar generating fears of inflation and driving investors into things tangible.

What makes me suspect that the US economy is going to remained mired in the mud however and that the equity markets are illusory is the simple price chart of Lumber that I am including here for your review.

Lumber and copper are two of the best indicators that I know of to gauge the condition of the economy. Why? Because copper reflects building activity and factory activity while Lumber reflects building activity. Copper has an international component to it meaning that it can be in weak demand here but strong demand overseas as those economies grow and expand while ours remains stagnant. Lumber however has no international component to it meaning that it reflects almost exclusively, the state of the US economy as far as the building industry goes. Employment in housing and multi-family dwelling units employs hundreds of thousands of workers from the trades not to mention the goods that go into a house once it is completed. It is therefore a much better reflection of how middle America is faring.

With that in mind, look at the following chart and tell me if you see a market that is evidencing a pickup in housing construction and signaling an improving economy ahead. Until it does, all such talk about the US economy being on the mend is nothing but mere blather.

Click chart to enlarge today’s Lumber chart in PDF format with commentary from Trader Dan Norcini