Monday, December 20, 2010

Beware the SLX

Today's column is about the steel sector, its momentum conditions, breakouts and potential upside targets. Since it is not yet on the site I'll have to limit the details but you should see it by 4-4:30 NYT at Click on my picture to read it (free).

Anyway, they like me to use ETFs whenever possible and there is one you might think is a good one - the Market Vectors Steel Index Fund (SLX). When doing the research, I noticed that the ETF and the Dow Jones Iron and Steel index did not line up. Was it the "iron" part? Nope. That's more of a technicality as just about all components are really iron and steel.

Digging further, I noticed these components of the SLX - Rio Tinto, Vale SA, Cliffs Natural Resources and Foster.  That's three miners and a rail/construction stock (Cliffs does mine iron ore). Rio and Vale alone make up 24% of the index's weight, too.

That does not mean the ETF is useless and it is no more useless than the HGX index is for the housing sector (it contains paper, construction materials and a mortgage stock aside from the homies). You just need to know what you have and not just assume by its name.

You know what happens when you assume? No, you can make an a** of yourself and leave me out of it. What happens is you increase your risk with faulty analysis that may work for a while just to sucker you in to making ever bigger bets. .

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