I don't want to call this "the top." But it's worth pointing out that the steel industry has been climbing for an awfully long time now. If Oregon Steel's (NYSE:OS) earnings warning yesterday turns out to be the peak, or close to it, this Fool, at least, will not faint from surprise.

For those who weren't watching, this is a brief rundown of what happened, followed by a few thoughts on why it might have happened:

  • Steel Technologies (NASDAQ:STTX): down 5.2%.
  • AK Steel (NYSE:AKS): down 5%.
  • Oregon Steel: down 4.8%.
  • Mittal Steel (NYSE:MT): down 2.6%.
  • Nucor (NYSE:NUE): down 2.1%.
  • U.S. Steel (NYSE:X): down 1.7%.
  • Most any other company with steel in its name: down.
  • Dow Jones Industrial Average: up 0.4%.

Now the strangest thing about yesterday's slide, which took place in the wake of Oregon's report, is that Oregon actually beat consensus analyst estimates for its fourth-quarter 2004 earnings. Analysts expected Oregon to earn $1.31 in the fourth quarter of 2004, and it did that and more (so long as you don't count a one-time charge that dropped the actual net to $1.27).

For the full year, Oregon Steel posted $4.03 in diluted profits per share, giving the company an apparent bargain basement P/E of 6. And therein may lie a clue. For as Nucor CEO Dan DiMicco emphasized in a press release yesterday: "The steel industry is a cyclical industry...."

Let me now quote at length from Fool alum Zeke Ashton, discussing cyclical stocks and using Ford (NYSE:F) as an example:

"A fledgling investor can get killed by investing in a company like Ford at a low P/E, which is probably a signal that investors expect the economy, and Ford's profits, to turn down in the near future. Historically, the time to buy companies like Ford is at the end of the down cycle, just before an economic upturn. At those times, these companies will often have very high P/E ratios because investors realize the company has value despite the occasional periods of very low profitability."

It just might be that investors took a close look at Oregon's near-record profits yesterday, calculated what those profits meant in terms of the company's P/E, and then married all of that up with CEO DiMicco's comments. At which point something clicked, and investors started to get nervous. When you consider that, at the same time Oregon reported its strong profits, it also warned that next quarter was going to be relatively weaker, perhaps they had good reason.

If you haven't got a good grasp on cyclicals yet -- don't worry. At Motley Fool Hidden Gems , we've found a good three dozen small caps with strong prospects to weather any economy, and any market cycle. Read all about them right here.

Fool contributor Rich Smith has no position, short or long, in any company mentioned above.