Why Steel ETF Has Bottomed After Lagging For So Long

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Robust gains inSteel Dynamics ( STLD ) andCliffs Natural Resources ( CLF ) pushed the global steel makers ETF ahead of the stock market Tuesday.

After severely underperforming the market for the past four years, many of the ETF's underlying holdings have formed bullish, cup-with-handle patterns. This suggests they may be forming a bottom and have started to recover from historically low demand.

In afternoon trade,Market Vectors Steel ETF ( SLX ) was up 2% vs. 0.33% for the SPDR S&P 500 ( SPY ).

SLX holds 27 steel producers from eight countries, mainly the U.S. The chart for SLX appears to have formed a bullish, three-month long, cup-with-handle base with a 49.66 buy point. It trades above both its 50-day moving average and 200-day moving average, which confirms that it's in a strong uptrend.

SLX severely lagged the market the past two years, melting 33% in 2011 and gaining only 4.72% in 2012, while SPY rose 2% and 16% in those periods. But SLX has taken the lead in the short run, climbing 11% in the past three months, while SPY added 7%.

It holds a rather weak IBD Relative Strength Rating of 38, which means its price performance has lagged 62% of the market over the past 12 months. Its IBD Accumulation-Distribution Rating of C on an A-to-E scale indicates institutional buying evens out with the selling.

Steel Dynamics , which makes up 4% of the ETF, shot up nearly 3% Tuesday to 15.40. It has broken out of a bullish, cup-with-handle pattern with a 14.64 buy point.

The company reported fourth-quarter profit that topped guidance and issued a positive outlook Monday evening. Earnings flew 93% year over year, snapping three quarters of zero growth. Sales dipped 8%. Jefferies analysts rated the stock hold.

"Steel Dynamics' outlook was positive but a bit vague/high level, citing 'potential' for building momentum in auto and manufacturing markets and noting areas indicating signs of improvement in nonresidential construction, from historically low levels currently," analyst Luke Folta and his colleague wrote in a client note. "To date in January, spot market demand/price trends for both steel and scrap have been far weaker than expected, lacking the positive seasonal momentum typically observed this time of the year."

United States Steel ( X ), weighted at 4% in SLX, reported a less-than-expected fourth-quarter loss Monday, mainly owing to lower costs. Jefferies also rated it hold, noting that it issued a "disappointing" first-quarter outlook.

"Results in North American Flat-Rolled (steel) are expected to be near break-even, despite higher shipments and spot pricing along with lower roll mill costs, due to lower average selling price on lagging index-based contract and higher maintenance costs," Folta wrote.

United States Steel shares dipped nearly 2% but they appear to have found support at their 50-day moving average. It also formed a bullish cup-with-handle chart pattern with a 26.39 buy point.

Nucor (NUE), weighted 5% in SLX, beat fourth-quarter estimates but guided lower for the first quarter. It shed 0.09% to 47.15. It's trading 12% above a 42.10 buy point in a long cup-with-handle pattern.

"Nucor noted some small improvement in construction markets, though noted that activity remains at historically anemic levels," Folta wrote in a client note. "Markets where demand is said to be the strongest continue to be manufactured goods including automotive, energy and heavy equipment."

Q4 earnings climbed 22% year over year, breaking a three-quarter string of stagnation. Sales dipped 8% year over year.

Cliffs Natural Resources jumped 2% to 36.01. Standard & Poor's rates it a hold.

"We believe the shares are fairly valued, currently trading at about 9.3 times our 2013 earnings per share estimate. And, with a dividend yield of over 8%, we believe that the market is already pricing in a possible reduction in the dividend," S&P wrote.

"Longer term, Cliff's strong market position in North America's iron ore market provides it with a solid platform for expansion in Asia and the ability to enter new markets such as ferrochrome. We believe Cliff's sales and earnings will rise on a combination of expansions at existing mines, continued consolidation of the global iron ore mining industry, and a secular increase in steel consumption in most of Asia."

The chart for Cliff is in a downtrend and hasn't formed a noteworthy pattern.

Follow Trang Ho on Twitter @TrangHoETFs .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: CLF , SLX , SPY , STLD , X

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