Joe Kunkle
Late last year, steel stocks saw some of the sharpest sell-offs in the market.
The Steel Market Vectors Fund (NYSE: SLX) fell from $114 to $20, and most steel producing companies hit five-year lows.
The interesting thing is that we’re seeing signals in steel stocks that are strikingly similar to what we saw in coal stocks and the Market Vectors Coal (NYSE: KOL) in late April.
At that time, investors saw a 43% jump in about 10 days.
Just prior to that jump, coal stocks were seeing bullish positioning and large institutional traders buying far out-of-the-money call options. A handful of investors and traders profited handsomely.
If this pattern holds true, and steel stocks behave is a similar fashion, investors who jump back in could see sizeable returns. And there are a number of interesting ways to do it.
Ways to Play Steel Resurgence
From March lows to May highs, KOL rose 130% while SLX rose less than 100%. Based on the positions in out-of-the-money call options for steel players such as Arcelor Mittal (NYSE: MT) and United States Steel (NYSE: X) it appears that steel still has a lot of room to run much higher
For example, a trader bought 7,000 contracts of the July $33/$40 vertical call spread, a bullish position, paying $1.45 per spread. That’s a $10,150,000 bullish position in U.S. Steel.
In another trade someone bought 2,150 contracts of the September $32.50/$35 vertical call spread in Arcelor Mittal.
Both of these bullish call spreads are far out-of-the-money. A 33% move in U.S. Steel and a 20% move in Arcelor Mittal are required for these investors to reach maximum profit – a move above the high strike yields max profits.
Those are strong bets that steel’s on it’s way up.
One of the strongest leaders in this group, United States Steel was one of the earliest to raise new capital, and while its shares have stabilized over the past six months, its lack of movement suggests overlooked value – not just for US Steel, but for the sector.
SLX is looking promising for technical traders as well. At 41.00 it’s settling just below it 200 day moving average at $41.78. If you’re not familiar with technical indicators, if SLX breaks above $42.20 it sends a solid buy signal to buy either individual stocks or the SLX.
With a changing supply and demand picture, steel prices are stabilizing as massive production cuts are now being priced in. This will boost steel stocks for months to come.
