Conclusion, Investment Implications, Strategy
When the US stock market is stagnant, as it has been since February, we make a special effort to try to find potential alternative investment ideas in the commodity space. The VanEck Vectors Steel ETF (SLX) is amid favorable conditions to resume its July 2020 Strategic advance from Tactical underlying support near $49.36, which was just tested and held. A sustained rise above this area would target an additional 18% rise to 62.00 per share.
Editor’s Note: SLX is a ETF with very low volume and net assets, so investors should carefully consider that in their investment process. However, the ETF’s purpose is to track the NYSE Arca Steel Index and, as a result, has maintained what we would consider to be relatively stable price movement despite it’s lack of activity. Moreover, SLX has maintained a significant and stable positive long term correlation with major steel companies like US Steel (X).
Analysis and Rationale
The VanEck Vectors Steel ETF (SLX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE® Arca Steel Index. The fund normally invests at least 80% of its total assets in common stocks and depositary receipts of companies involved in the steel sector. Such companies may include small- and medium-capitalization companies and foreign and emerging market issuers. It may concentrate its investments in a particular industry or group of industries to the extent that the Steel Index concentrates in an industry or group of industries. The fund is non-diversified.
The upper panel of Chart 1 below plots SLX daily since November 2020 along with its 200- and 50-day moving averages, widely-watched major and minor trend proxies. The lower panel displays a corresponding daily relative performance chart of SLX versus the benchmark S&P 500 (SPX, blue) along with its 63-day moving average (green, quarterly, our Strategic time period).
The rightmost green highlights in the upper panel show that SLX appears to be resuming its August 2020 major uptrend, as defined by its 200-day MA, following a Mar 25th test of the 50-day MA. Meanwhile, SLX’s current trend of quarterly relative outperformance versus SPX as shown in the lower panel also appears to be resuming following a test of it on that same date. A sustained rise above the 50-day MA, currently situated at $49.36, would help to confirm this and would target an additional 18% rise to $62.00 per share.
Table 1 below shows that considering the aforementioned upside target and a protective stop placed below the $49.72 area, a long entry price of $52.47 would provide a 1:3.5 risk/reward ratio (risking $1.00 to make $3.50) with an initial risk of 5.2%.
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Please consult the table showing our Asbury 6 key market metrics to help determine if this investment is suitable for you.