ETF Talk: Investing with the Strength of Steel
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Doug Fabian Fabian.com |
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One way to ride the expected economic turnaround this year is to invest in steel. If investing in steel interests you, an exchange-traded fund (ETF) that you might want to consider is Market Vectors Steel ETF (SLX). This ETF has been trending upward since last spring and should gain further momentum from rising demand for steel as the economy improves. An ETF is an attractive way to invest in steel because it offers diversification through a variety of companies in the industry, not just one that could melt down unexpectedly.
J.P. Morgan appears to be taking notice of steel’s improved outlook. The investment firm recently raised its price targets on three of the industry’s major companies: U.S. Steel (X), AK Steel (AKS) and Arcelor Mittal (MT). The report also mentioned that scrap prices have rebounded by roughly 25% since their mid-November lows and could rise by another 15% due to seasonal supply constraints, strong exports, and low inventory levels at the mills. This data is significant because the price of scrap metal is an economic indicator. When the price of scrap metal rises, the economy typically is on the upswing.
A big reason for the increased demand in steel is China’s voracious appetite for the metal. The Chinese economy has been growing quickly in recent years, while many other economies around the world have been languishing. As a result, China's surging demand for steel is gaining widened attention.
“Already the world's largest producer by far, the country is expected to rev up production by nearly 10%, The Wall Street Journal reported Jan. 11. “But the higher output likely won't exceed demand, pushing prices higher world-wide for steel, its raw materials and even coal.”
Steelmakers that temporarily closed a number of mills and cut production as economic conditions sagged last year now are boosting production to address the increased demand. Resurgence in the steel industry is lifting the share prices of the public companies that produce steel. The following chart shows the sustained improvement in the fortunes of the steel industry ETF, while also indicating that the fund is climbing again after a recent pullback that lets new investors buy the position at a reduced entry price.
As you can see, the ETF has shown occasional weakness during its rise. Consider such dips good buying opportunities. If you are interested in buying SLX, the recent pullback that preceded the fund’s latest rise may sway you to do so soon.
Doug Fabian is best known as the ETF expert and for his trend-following timing system known as the Fabian Plan that has helped investors make double-digit annualized returns since 1977. He is the editor of two financial newsletters, his flagship advisory service Successful Investing and High Monthly Income, as well as the weekly trading service, ETF Trader, and his weekly e-letter, Making Money Alert, all published by Eagle Publishing. He is also the radio talk show host of the syndicated show Doug Fabian's Wealth Strategies. He has helped his readers and listeners successfully navigate bull and bear markets for more than 30 years. He often appears on CNBC, CNN, FOX News, and the Money Show, and he has also been featured in The Wall Street Journal, USA Today, The New York Times, Fortune, Smart Money, and Barron's.