Has Coal Bottomed?

One of the most beaten down sectors in the market over the past couple of years has been coal. Using the Market Vectors Coal ETF ($KOL), coal stocks have seen a decrease of over 85% from their post-financial crisis high (set in March of 2011). Some companies have gotten demolished and have been forced into bankruptcy (like Arch Coal), while some companies have seen their stock sink extensively, and thus have been forced to reverse split their stocks multiple times (like Peabody Energy Corporation).
KOL Chart

KOL data by YCharts

All in all, the last decade has been bad for coal – and I’m not only talking about prices of coal stocks. Just so you get an idea, fundamentally, coal’s share of US electricity generation fell from 36%to 28% just in the 1 year between December 2014 and December 2015. Solar now employs more people than coal. Regulations, the shutting down of old plants, and the evolution of natural gas has led to coal’s decline.

CoalDeath

With headlines like the one above, and with the first time sentencing of a coal executive for violating federal safety standards….one has to ask the question: Has the market gotten too bearish on the industry? After all, while US coal production is at a multi-decade low…

US Coal Production Chart

US Coal Production data by YCharts

…it still is the single largest net electricity generation source in the country, even if it’s “lead” is diminishing.

Net Electricity Generation

 

So, has the sector hit a bottom already? If coal isn’t going extinct as a source of energy, are things going to turn up from here?

CIO of Cambria Investment Management, Meb Faber, laid out his coal case back in November of 2015. According to his research, there has been only one time in history in which an industry printed down 6 years in a row. That industry? Coal, who’s streak ended in 1933.

Following his research, for coal to finish down 7 years in a row, it has to close below it’s 2016 opening price of $6.06. Currently, the price is about $8.00. Let’s take a look at the technical chart to see its recent performance.

KOL daily

You can see, coal bottomed earlier this year. It had a really nice run. Then it consolidated for about a month. Now it’s back on the move. In fact, today marks the first time $KOL has closed above the 200 day moving average since September 2014. Now, that doesn’t mean a rally is necessarily in store, but combine that with the fact that we’ve already established a bottom and consolidated (and thus worked off any short-term overbought signals), I think the possibility of a rally higher is decent.

How high we go is anybody’s guess, but I can see this moving in the intermediate term (the next couple of months) to the $9.60-10 range. Above that, we are probably looking at $13-15 range.

Looking at all the facts and views above, I think this might be a worthwhile trade. If $KOL reverses and closes below $7.00, then everything is off the table. But until that happens, coal is looking exceedingly well for a rally in the future.


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