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You’ve probably heard the old saying; “It’s always darkest before the dawn.” Well, I believe that applies to investing.

In watching the markets for over 20 years, it seems that when the news gets the worst, that’s when a sector or market is nearing its bottom.

It makes sense – I call it the point of “maximum pessimism,” because sentiment has gotten so bad that most consider all hope lost.

For many investors, when things get this bad they pull their money out of the sector or market and look for greener pastures. But as I see it, this is exactly the point at which you should be looking for opportunities. Right now, I’m seeing one sector in particular that looks to be at the point of maximum pessimism, and my “bad news indicator” is telling me it’s time to buy.

When Bad News Finds a Bottom

To show you how accurate this indicator is, let me give you a recent example.

On August 28, I read a story about 120 Sardinian miners barricading themselves 1,300 feet underground with 770 lbs. of dynamite and piles of coal blocking the entrance to the mine.

What drove these miners to this point of desperation? The price of coal had dropped so far over the past couple of years that the Italian government was considering halting coal mining and instead using the mine as a carbon capture facility.

Then on September 5, Peabody Energy, the largest coal miner in the world by volume, decided to permanently close a mine in Indiana after the drop in demand and price of coal.

So remember … one extreme, hopeless event happened on Aug. 28 and the other happened on September 5. With that in mind, let’s look at the coal ETF below.

The Horrible News Calls a Bottom

 

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In the case of the miners’ barricade, coal reached its bottom just eight short days later. In the case of the Peabody mine, they closed the mine on the EXACT day of coal’s low.

I can’t tell you how many times I’ve seen something like this through the years. Now, don’t get me wrong … lots of bad news can come out while an asset continues downward. But when you see some news where it seems like all hope is lost, then you’re likely closer to the bottom in that asset than it may seem from an emotional/psychological standpoint.

Here’s an even more recent example:

Early in September, as I was watching CNBC and Bloomberg TV in my office while working, all I heard was how bad the sell-off in iron ore had gotten. (Iron ore is used to make steel).

Now, the news had been bad about steel for a while. But on these two days in early September, it felt like it was all coming to a head. They must have run the iron ore story at least 10 to 20 times during those few days, as opposed to earlier in the summer when it would only run once or twice a day.

This told me that the sentiment for iron ore, and therefore steel, was getting to a point of maximum pessimism. So let’s check out the

Maximum Pessimism Called the Bottom to the Very Day

 

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In the chart above, you can see that I’ve pointed to where steel was trading when all of this news was happening. It called the bottom in the price of steel.

This was the moment of maximum pessimism, but the good news wasn’t far behind …

The Dawn Has Come for Steel Once Again

On Friday, September 7 (just two short days later), China announced a $100 billion infrastructure stimulus program.

Well, that changed everything for steel, since it’s widely used in building out infrastructure. That’s a lot of money the Chinese are going to be spending on iron ore and steel.

Days earlier, it couldn’t have looked any darker for the steel industry. But now, the sun has come out once again.

In fact, the steel ETF may be trading in the $40s right now, but ultimately, I believe it could head back to the $70s over the upcoming 12-18 months.

You see, the price of steel has been suppressed … too much so, in fact. And when that happens, the snap backs can happen quicker than when a sector is mildly oversold, rather than extremely oversold like steel has been.

The market mispriced steel as everyone lost hope that the price would ever come back. After all, China is slowing down and so is most of the rest of the world. So why would steel ever head back up again?

It would because it’s almost always darkest before the dawn.

As it Was for the Euro, So it Will Be for Steel

Not long ago, I was asked about the euro. It was when the euro break-up news was coming out all day, every day. I told the TV commentator who asked me that the euro would head back to the 1.28 to 1.30 level.

Well, the other guest thought this was ridiculous and, of course, took the other view. However, if you check your quotes on the euro (EUR/USD), you’ll see that it touched 1.30. It was at a point of maximum pessimism.

That’s where I still see steel at. It’s just coming out of a point of maximum pessimism, and you still can’t get most investors to touch it. That’s why I believe it’s ripe for a buy right now.

So my advice is to buy the Market Vectors Steel ETF (SLX) and set yourself up to profit as steels leaves the bad news behind it.

Have a nice day!

Sean Hyman
Editor, Currency Cross Trader

P.S. Finding a reliable indicator can make all the difference between getting the timing right for a winning trade. I’ve discovered one that I’ve been using to bring my Currency Cross Trader subscribers a string of winners over the past nine months. I call it the “flash-point indicator,” and to learn how it can help you, click here for my special report.


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