Tough As Steel

By Duru

July 23, 2005

 

On Friday, Citigroup Smith Barney upgraded United States Steel Corp. (X) to buy from sell. These guys even had the nerves of steel to raise their price target from $34 to $52. Such a continued rise would mark an additional 25% in paper profits.

Enough is enough. After watching one steel stock after another gently rise from recent bottoms and then finally pop big in the last week, I am now forced to write again about these commodities (see my standard disclaimer on stock talk). In my last missive on steel, I joined in on the bubble-talk about lofty prices for steel. I noted that I had finally jumped on the steel bandwagon at the highs in March. It now appears that my next level of interest came at another key turning point. Since that missive, we have witnessed a series of poor to lukewarm earnings results from various steel companies that have led to wild and vigorous buying of their shares. This is a classic sign of a bottom, and the technical strength on display is not to be taken lightly. I am not posting updates of the charts here, but I strongly encourage you to see how dramatic the landscape has changed since I posted charts of CMC, STLD, OS, RS, SCHN, and X. A new rally is underway. The market is betting that things cannot get worse for steel. Until someone comes out with news that is even worse than their last batch of uglies, I am guessing the market will continue to get more and more comfortable with higher prices for steel stocks.

Now, certainly most of these stocks are not yet in the clear. Given the dramatic breakdown from March highs, it will take new highs to put a final stamp of approval on a new bull in steel. We should expect that many folks who got caught buying at higher prices are crossing their fingers for a lucky second chance to get out whole. In addition, last week's rise in steel stocks was so sharp that we should expect that a good part of the fresh demand came from panicked shorts covering their bearish bets. If this fuel dries up, a pullback will likely ensue as the sellers abandon ship. But this confluence of events is where things will get interesting. Look for whether the next pullback drags these stocks back under recent up-trends or whether we get successful tests of key technical supports like the 50DMA, 200DMA, or those very same up-trend lines. And definitely watch out if some steel producer actually comes out with good news! So far, these stocks are trying to stay as tough as their underlying commodity.

Wherever the market goes from here, just be careful out there!

 

DrDuru, 2005