Rally of steel: Unexpected stocks see massive gains this year

The real steel rally

Steel stocks have enjoyed a sterling rally in 2016, and the two best performers in the broad S&P 1500 index have been U.S. Steel and AK Steel. Those two stocks have risen about 160 percent and 140 percent, respectively.

However, many doubt that the high-flying names will be able to add to their gains.

Unsurprisingly, the big driver for the stocks has been rising steel prices. While reduced capacity in the industry and increased taxes on Chinese steel do effectively explain the rally, they do not suggest that one would be wise to buy the stocks now, according to S&P Global equity chief investment officer Erin Gibbs.

"There might be some growth in 2017, but again, it's really not expanding the capacity and we see the level of steel being more held at the status quo at this point," Gibbs said this week on CNBC's "Trading Nation."

Curb your enthusiasm

A contractor guides a steel beam into place while working on the Korean Air Lines Co. Wilshire Grand hotel and office building in downtown Los Angeles, California.
Patrick T. Fallon | Bloomberg | Getty Images

U.S. Steel and AK Steel will both report quarterly earnings next Tuesday. Yet despite gains this year, both manufacturers are expected to post losses.

Tarrifs on steel imports, particularly those of Chinese steel, have risen following efforts to support a restructuring in the sector. Oversupply has been an issue for the steel industry in recent years.

Lee McMillan, metals and mining analyst at Clarksons Platou Securities, agrees that steel levels are "as good as we're going to see for a while."

McMillan told CNBC this week that "we are returning to global oversupply, and that even trade flows will adjust, and that we will find new sources of imports from countries not named in the trade cases."

He has a sell rating on U.S. Steel, and rates AK Steel a hold.

The charts tell a similar story, according to Ari Wald, head of technical analysis at Oppenheimer.

"It's getting late here," Wald said this week on "Trading Nation." "We think if you're putting new money into work, there are indeed better opportunities elsewhere."