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3 Steel Stocks to Short Before Things Get Worse

June opened with a significant, though rather controversial milestone: All 8.7 million jobs that were terminated during the Great Recession have finally been recovered.

Cyclical Sectors

However, criticism of the data released by the U.S. Department of Labor quickly poured in, noting that not all jobs are created equal. Many sectors continue to struggle in the new economy, with steel stocks being particularly affected.

Recent global fundamentals have also been bearish for steel stocks. The broad economic decline in China has severely curtailed demand for the industrial metal, with reports indicating that the Chinese steel industry has been receding over the past 14 months.

Additionally, Chinese steel stocks are struggling with product overcapacity — a problem shared by American steel stocks due to excessive imports.

These and other factors have negatively contributed to a shocking drop in steel spot prices, down to “levels last seen during the financial crisis of 2008.” While some sectors like steel products companies are benefitting from the lower inventory costs, many steel stocks have been forced to scale back their businesses. As a result, there’s a shorting opportunity for distressed metal producers.

Here are three steel stocks that look particularly vulnerable to the bear trade.

U.S. Steel Corp. (X)

One of the most iconic names among steel stocks, U.S. Steel Corp. (X) was finally forced to bite the bullet. After having a stellar run in the markets during the first three quarters of 2014, X stock has since collapsed.

X stock is down 22% year-to-date, leaving little choice but for U.S. Steel’s management team to issue Worker Adjustment and Retraining Notification — commonly abbreviated as WARN — letters that could affect up to 1,332 employees at its Fairfield Works facility.

Unfortunately for X stock, the stated intention of the U.S. Federal Reserve to gradually unwind the monetary accommodation policies of former Fed chair Ben Bernanke conflicts with the business interests of domestic steel stocks.

While other countries have weakened their currencies, the U.S. dollar has strengthened considerably over the past 52 weeks. This condition exacerbates an already difficult challenge of oversupply from excessive imports of steel. Adding to the dilemma, U.S. exported products have become more expensive relative to foreign currency exchange rates.

X stock, technical chart
Source: Source: JYE Financial, unless otherwise indicated

In the equity markets, the technical picture for X stock doesn’t leave much room for a bullish interpretation. On a monthly candlestick chart for X stock, the appearance of an unusually shaped head-and-shoulders pattern is tough to ignore. If the bearish implications of the pattern plays out, X stock could fall to a range between $15 and $17, which would represent a loss of 17% to 27% against U.S. Steel’s current market value.

Combined with the unsightly fundamentals, X stock will likely face more problems in the markets before it has an opportunity to redeem itself.

Nucor Corp. (NUE)

The most recent earnings forecast adjustment for Nucor Corp. (NUE) — “the biggest U.S. steel maker by production capacity,” — was an alarming confirmation of the bearish headwinds stymieing domestic steel stocks. Nucor expects its earnings in the second quarter of fiscal year 2015 to fall to between 20 to 25 cents per share of NUE stock. This is a fairly deep cutback from the 30 cents per share consensus among Wall Street analysts.

The primary bearish contributor for NUE stock’s fundamentals is the decline in average selling prices for the company’s products, which is a direct result of dumping practices by foreign steel stocks who themselves are burdened with overcapacity. Favorable currency dynamics — at least from the perspective of foreign companies — have done nothing but add fuel to NUE stock’s house-fire. Even a decline in raw material costs for Nucor won’t be enough to offset shrinking profit margins.

NUE stock, technical chart
Source: Source: JYE Financial, unless otherwise indicated

Given that NUE stock is down almost 10% year-to-date, the bulls really need to show some initiative. Unfortunately for them, June was not pretty, with NUE stock losing nearly 7% of market value. This created technical consequences, as a monthly candlestick chart reveals that virtually all of NUE stock’s price action for the year occurred inside the high and low range for January. This leaves the aforementioned sequence of trading hanging precariously as the bears will undoubtedly look to strike, especially if Nucor’s earnings report fails to impress.

NUE stock is swimming against major currents, suggesting more downside to come before an eventual recovery in the markets.

AK Steel (AKS)

The hardest hit among the three steel stocks mentioned on this article — down an astonishing 35% year-to-date — AK Steel Holding Corp. (AKS) has quite an uphill battle to climb, from both a fundamental and technical perspective.

The financial performance of AKS stock has been nothing short of ugly, with several key metrics trending negatively. Pouring salt on a festering wound, popular investment news source TheStreet recently ran an article labeling AKS stock as a “dead-cat bounce candidate.”

It’s not without warrant since AKS stock has had a disastrous sequence over the past 30 days. After closing at $5.19 on the first day of June, AKS stock finished the month at $3.87, for a loss of more than 25%. The usual suspects were blamed for the severe underperformance — unusually low carbon steel prices, unfair dumping practices, and unfavorable currency dynamics.

AKS stock, technical chart
Source: Source: JYE Financial, unless otherwise indicated

When it comes to the technical prospects for recovery in AKS stock, we can add one more “un-” to the mix: unlikely.

Since AKS stock’s initial public offering in March of 1994 until April of 2015, there have been 22 times when its month-over-month performance was down 20% or worse. Only nine times have the bulls been able to stage a comeback within a three-month time period, giving the bears a situational probability of 59% that the markets will favor the short trade, considering that the month of June ended 26.4% in the red against May.

There will come a time when the markets will again smile on AKS stock. Unfortunately for the loyalists, that time is not now.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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