Our proprietary money flow indicators have turned negative on oil. Sell all long positions.
We will not yet short oil because slight geopolitical hiccup can make the oil spike again. However ,it is finally time to short coal. Coal prices compete with natural gas for electricity generation. Natural gas prices have come down and with the discovery of massive finds in a number of shales, natural gas prices are likely to stay down, thereby putting pressure on coal prices.
Another reason for spike in coal prices has been the potential huge exports to India and China. Market’s export story is misplaced in the longer term context. Both India and China have enough coal deposits and it is a matter of time before exports drop. Further there were short term difficulties in exports from Australia, but these difficulties are being resolved. Freight from Australia to India and China is lot lees than from US.
Further the market seems oblivious to sharply rising costs for coal miners in US. As the price of coal comes down, the costs are not likely to fall squeezing margins.
A difficulty in shorting coal stocks is the potential M&A activity.We would not want to be short a stock that gets a buyout offer. This rationale leaves us with only two choices: CNX and BTU.
These two are the largest players and will be the acquirers. CNX is likely to have a downside trigger when it reports earnings this week and market starts understanding the cost of production increases.
Short CNX here and add aggressively to positions on spikes over $85 prior to the earning release.
If we are right, Buy to Cover in low $60s in post earning reaction. Wait for a bounce, watch for money flow to turn negative and if oil front month future stays below $125, start nibbling as a short in $ 70’s