Trading the Stocks of Steel and Iron
The conventional wisdom on industrial metals like steel and iron is that companies operating in this space will see share price appreciation to the extent that China keeps booming. And there’s no doubt that concerns over whether a cooling economy in China will lead to a hard landing or a soft landing have helped keep buyers on the sidelines in stocks like Nucor Corp (NYSE: NUE) and U.S. Steel (NYSE: X) since the spring.
But for short-term traders, the most pressing question is whether or not the rapid gains in these markets over the past several days and weeks – as well as in fellow steel stock, AK Steel Holding Corporation (NYSE: AKS) – are a signal to buy.
Of the three stocks, Nucor Inc. is the only one trading above its 200-day moving average. Because of this, any weakness in NUE will likely prove more rewarding to buyers of weakness and sellers of strength than a pullback in AKS or X, both of which continue to trade in bear market territory. In fact, given that both AKS and X have entered technically overbought levels in bear market territory, the potential for renewed selling and short selling here is greater than average.
AK Steel Holding earned a “consider avoiding” rating of 3 out of 10 in Wednesday’s trading, and a significant, negative, short-term edge of more than 1%. U.S. Steel’s edge is more modest, below half a percent, and the stock is set to open Thursday morning with a 4 out of 10 rating that puts the stock at the lower end of our “neutral category.”
Up six out of the past seven trading days, shares of Nucor are nearly as overbought in the short-term as U.S. Steel. The stock has not traded in technically oversold territory since the Thanksgiving holiday in late November, and has a short-term, negative edge of less than half a percent.
Avoid single stock risk by trading and investing in exchange-traded funds based on industrial metals and mining. Here, the leading ETF is the S&P Metals & Mining SPDRS ETF (NYSE: XME), which includes steel companies like Steel Dynamics (NASDAQ: STLD), which is newly above its 200-day moving average, and Reliance Steel & Aluminum (NYSE: RS). Shares of RS have been trading in bull market territory on a consistent basis since mid-December, and are also short-term overbought.
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David Penn is Editor in Chief of TradingMarkets.com.