The tariff wars may end up serving a good purpose for the U.S. over the long run, but meanwhile, it reeks havoc on the stock market. We saw how the headlines crippled last year’s rally. The effects were more more true in certain sectors like industrials and materials, and U.S. Steel (NYSE:X) stock is directly in the line of fire. Materials like steel are an easy target for nations to use as negotiating tactics. It’s easy to levy a special tariff on steel and it has an extreme impact on all companies that deal with it on both sides of the fight.
As a result, last year was very difficult for X stock price. Even when the markets rallied in early 2018 X struggled. The pain continued all year, leading to 52-week lows on Christmas Eve.
Luckily, the stock market has had a sharp snap back rally. Even U.S. Steel stock is up 9% year to date. This is even after the selling pressure we saw in stocks last week. However it’s not all good news for X stock. Since it’s February highs, X has drifted down 20% and close to its December lows. Meanwhile, the S&P 500 is a mere 5% off all-time highs.
X stock rallied hard on Monday, but that was on the back of an incredible rally in general equities. Investor fears from last week’s selling disappeared fast. So I still don’t trust a one-day rally in X. The stock is down more than 50% in 12 months, so I need more proof that it’s done falling.
This is not a judgement of U.S. Steel itself or its efforts, but there are clearly outside factors hindering the success of X stock. So even if it’s merely a broken stock not a broken company, I’d rather risk my money elsewhere until this downside-trend ends.
Valuation of X is not the problem. Last year, I thought it was cheap at 11x trailing P/E, and it got even cheaper. X is the perfect value trap. It’s now trading at 3 trailing P/E and still not attractive enough to own. Clearly, there are outside forces at play.
Trading X Stock
Technically, there is nothing urgent about owning the stock at this point in time. I believe that it needs an event in order to trigger a rally. There needs to be a clear bottoming pattern before the chart gets tight enough to cause a recovery spike that can last. Otherwise, the descending channel of lower highs and lower lows will continue. As soon as the bulls in X stock are able to breach the trend line then we can establish upside targets. Until then, the bears in it will continue to sell the rips.
X is stuck in a nasty selling pattern. The weekly chart shows that it’s approaching a bottom from September of 2016. While this could lend support, it is also a risk. IF X fails to hold in the $15.80 zone, then it could invite more momentum sellers on a bearish pattern that targets another leg lower to retest $12.50. This is not a forecast but it is a possibility.
Shorter term, the bounce in X now brings it into contention for a level that has been a pivot since early January. These tend to be temporary resistance on the way up. So the bulls have some work to do this week to rise above $21 per share. If this happens then it brings X stock closer to another test of the upper limit of the selling channel. But even then, there is residual resistance around $22 from the December price action. Meanwhile, X stock cannot lose $19 per share as it will create another major setback in the bullish efforts.
The Bottom Line for X Stock
In summary, U.S. Steel has value on its side but there’s no obvious imminent breakout brewing. The bulls continue to work hard, but without a sustained rally, I’m not a buyer of X stock.
Not every descending channel is an obvious breakout opportunity. Some trends can last a long time. And this downside trend exists inside a very bullish market-wide rally, so it’s counterproductive to own X stock here. I’d rather join an upward moving ticker. I don’t want to fight the tape even if I think I am right.
U.S. Steel is clearly a broken stock. The company has value but the selling is relentless. The tape tells me to wait it out.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.