Steel Is For Real

All around us trends are developing. By the time the general public learns of a trend, more often than not, it is in the later stages and close to its conclusion. I have spent over 20 years attempting to identify trends early, particularly in the stock market. Over this same time I've tried to recognize trends in other areas such as real estate but don't seem to have the ability to do this as well as I do in the equity and financial markets.

For several years now I've used the same charting system which lets me keep notes and trend lines drawn on a chart and, whether I like it or not, I'm able to go back and see these notes and lines and am quickly reminded how it has played out.

The last great trend I did NOT capitalize on was NVIDIA Corporation NVDA. I know this because in addition to the lines drawn on my chart in 2014, I vividly remember talking at length with colleagues regarding some unusual semiconductor stocks that were breaking out. NVIDIA was one of those stocks.

During one of our standard investment meetings we talked about adding some specific semiconductor exposure due to the charts I saw developing. I pointed out chart after chart but ultimately recommended Intel Corporation INTC as our best option due to its strong fundamentals. "If you like the trend developing in NVIDIA, why don't we add that one?" said a colleague. "Well, I'm really unsure what these new chips are all about. I would rather go with a better fundamental play like Intel where I can feel comfortable with the numbers."

Translation – because I'm scared of looking dumb, buying a stock that's hard to value and so I'd rather own another. Needless to say, every time I look at the chart of NVDIA I'm reminded of what I passed on. It's painful.

At present there are some very nice trends developing in areas that I believe are worth noting. In addition, there are diversified ways to invest in these trends so that you can still have the comfort of following the move, without the concern of individual stock specific risk. In hindsight, rather than venture into Intel, I might have considered compromising with the semiconductor trend break, adding the Market Vectors Semiconductor ETF (SMH), thus owning the entire group, rather than owning just one.

Steel Is an Emerging Trend

Whether investors believe anything will get done with a government backed infrastructure plan or not, steel stocks are starting to show signs of what I believe is a new, long-term bullish trend.

The steel index, as represented by the ETF SLX, has been in a steady downtrend since its first post IPO peak around the end of 2007. This ETF was launched at the height of the ‘global growth' theme and promptly was sent behind the woodshed when ‘global growth' turned into ‘global meltdown.' It bottomed in 2008, slightly ahead of the general market and then proceeded to have a strong oversold bounce, making a significant lower high a few years later. The rest is history as the ETF followed a downward trajectory of lower lows and lower highs actually making a brand new, all-time low, in late 2015 almost seven years after the global meltdown sparked by the US financial and mortgage crisis.

As is typically the case, a bear trend is usually capped off with a towel trade capitulation where investors just want out at any price. This is clearly evident with the 2015 selloff which correlates with the end of the year and is a perfect display of tax-loss harvesting. Once this selling was complete, the ETF saw a pretty significant bounce from these oversold levels all throughout 2016. This also makes sense considering at how extreme the end of the trend became.

Throughout this year we've seen the steel index consolidate these gains and now the ETF looks like it wants to continue its move. From my vantage point this looks like a great place to begin building a longer term position with a current stop around the $34 – $35 level. We've recently done just that, adding shares for managed client accounts over the last several days with a basis around the $42.00 level.

There is likely no need to rush the trade, but rather to identify the opportunity first and commit to some sort of plan. At present my plan is really quite simple. Eventually, I want to have a full position in the portfolio. Because it is an ETF I wouldn't mind taking portfolio risk of around 1 percent on the trade. What this means is that if I am wrong and stopped out, I have predetermined how much I am willing to risk should my exit price be executed near my stop level.

In conclusion, if the steel trend plays out, some people may wonder how early investors were able to capitalize when others are just now finding the sector on their radar. It's not rocket science but rather a keen eye and the patience to let the trend develop over time.

As of the time of writing I am personally long SLX and INTC in addition to these both being held in client accounts.

The above article is my personal view on the stock (or stocks) mentioned and not a recommendation for you to personally own it as I don't know your individual financial situation. All information presented is understood to be accurate at the time writing via any sources referenced. Be sure to do your own research, verify all information, consider your own financial situation, and consult your financial advisor before investing in any security or listening to any opinion on the internet.