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!