Market participants have been indiscriminately running up all stocks that they perceive as part of the reflation trade. This herd behavior has created significant shorting opportunities in individual names.
Fundamentals of coal stocks have not changed, while the stocks have doubled. Our data shows that exports of coal from the US have neither gone up nor are likely to go up.
Within the US utilities are the major users of coal and they all operate on long term contracts. Our data shows that due to lower electricity demand inventories of coal at power plants are unusually high.
Now for the first time since the rally began, we are beginning to see bearish put option flow in coal names.
Due to potential of mergers and acquisitions in this space, we recommend staying away from smaller names. Consider focusing short sales on two of the largest names, namely CNX (Consol Energy) and BTU (Peabody Energy). Consider lightly scaling in short sell on CNX right here around $41.50 and on BTU around $35.84.
