Coal Ready to Fire Back Up?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
"Diamonds are nothing more than chunks of coal that stuck to their jobs." - Malcolm Forbes
Despite continued lingering concerns over the recent debt downgrades by S&P of European debt, there does appear to be some kind of return to “normalcy” occurring in stock markets. I’ve been writing about the idea that we are in for a “Winter Resolution” following the Summer Crash and Fall-Melt Up of last year, whereby correlations and volatility drops as a trend asserts itself in risk assets. It appears that inflation expectations are back and market participants are sensing that the end of the world may not be here after all.
Assuming the environment for favorable risk-taking persists as it seems to want to given various intermarket relationships I track, the next logical question becomes how best to position for it. One interesting area of the market to consider is coal. Take a look below at the price ratio of the Market Vectors Coal ETF (NYSEMKT: KOL) relative to the S&P 500 (NYSEMKT: IVV). As a reminder, a rising price ratio means the numerator/KOL is outperforming (up more/down less) the denominator/IVV.
Notice how weak coal stocks on average were last year, particularly in September as the Summer Crash unfolded and the crisis in Europe erupted. September’s significant weakness sent the ratio back to 2009 levels, undoing all of the outperformance in the group since then. While some money moved back into the group as the October Melt-Up was taking place, it proved to be a false start in terms of overall leadership. However, the current price action does seem to be stabilizing, suggesting that a more sustained period of outperformace may be at hand for KOL.
What’s nice about the ETF is that it is not just U.S.-based. There is a decent amount of foreign stock and emerging market exposure as well. Given how poorly emerging markets (NYSEMKT: VWO) performed relative to the U.S. last year, a general move back into overseas equities would benefit the fund as well, particularly if China’s economic slow down abates and money returns to the region. Coal may be just the right area to position into during the Winter Resolution.
The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.
