Warning: 3 Sectors That Are Dangerously Overbought
by Teeka Tiwari 06/10/09
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Since the April reversal, the steel sector has been on a tear, with fund managers clamoring to get back into the sector. Steel has been this overbought on eight previous occasions during the past 15 years, so it has a strong record of getting very overbought.
Just as important, though, shortly after reaching such overbought readings the entire sector has experienced broad-based, vicious sell-offs.
The next sell alert that hits the steel/iron sector will be occurring from the highest level we've seen since Jan. 15, 2008. You can see in the table below just how profitable those January alerts were.
There aren't many ETFs that cover this specific sector, so we only use two:
1. Market Vector Steel Index Fund (SLX)
2. SPDR S&P Metals & Mining (XME)
When the sell signal comes, both of these ETFs will represent excellent shorting opportunities.
On the stock front, as of the data we have now, the following stocks look to be good short-side contenders:
1. POSCO (PKX)
2. Omega Flex Inc. (OFLX)
3. Gibraltar Industries Inc. (ROCK)
All three of these stocks are lagging their peers and are still struggling to break out of their downtrends.
But remember: Steel hasn't reversed yet. Steel could go up quite a bit more before it finally weakens.
The sell alerts we saw previous to the most recent sell alert reversal were on Nov. 6, 2008, and Jan. 15, 2009. Below is the trade data from those alerts:
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