Since spotlighting steel early last month, the previously lagging industry has continued its comeback. Prior to its recent rebound, this cohort of economically sensitive stocks found themselves sitting uncomfortably in the worst performing sector for the year — basic materials. Plagued by persistent weakness in emerging markets, the basic materials sector and most anything tied to commodities had been suffering.
The fate of commodities is often intertwined with emerging markets since many players in the space are large importers (think China) or exporters (think Brazil) of these raw materials.
The striking change in character for the materials sector can be viewed using a PerfChart. The first graphic shows the year-to-date relative sector performance up until August of this year. As suggested earlier, the worst-performing sector was basic materials.
The next graphic shows the past month’s performance as of Tuesday this week. Perhaps the largest difference between the two pictures is the basic materials sector’s resounding resurrection from worst performer to best performer.
The obvious culprit for the Materials SPDR’s (XLB) newfound strength is the ongoing surge in emerging markets like China. Which brings us back to steel. The Market Vectors Steel ETF (SLX) is now in a convincing uptrend, complete with rising 50-day moving average. During the past three trading sessions, the SLX has taken a well-deserved breather by pulling back a bit in price.
Digging deeper into the sector reveals a number of compelling bullish charts from U.S. Steel (X) to Steel Dynamics (STLD) and AK Steel (AKS).
The recent steel surge lifted X out of a multimonth base that looks to be a fairly convincing bottom in the stock. The current pullback might be providing a low-risk entry point for those who failed to buy the recent breakout.
If you’re looking for bullish exposure to the commodities space consider these two bullish plays on X — one aggressive and one conservative.
Aggressive: Buy the Nov 19 call around $1.85. The reward is unlimited, and the risk is limited to the initial debit paid. To limit the risk, consider exiting if X breaks below its 50-day moving average at $18.50.
Conservative: Sell the Oct 19 put around 65 cents. The reward is limited to the initial 65 cents credit received and will be captured provided X remains above $19. The max risk is unlimited until the stock reaches zero, but to minimize the downside, you could exit if X breaks below its 50-day moving average at $18.50.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.