What are indicators?
Stock prices are driven by various parameters. Some of these movements are driven by the economy. Other movements are explained by the industry scenario that the company—whose stock we’re talking about—operates in. Some of the movements are driven by factors that are specific for the company. The other movements either can or can’t be explained by technical and behavioral factors.
Our macro section talks about macroeconomic factors. At times, we also cover factors that are specific for a company—such as earnings and major developments. To understand industry dynamics, we cover industry primers and other industry pieces.
As the name suggests, indicators show what could happen to the industry in the short to medium term—within the next six months. Short-term movements in coal prices are affected by various parameters—like weather and natural gas prices. In that sense, they indicate coal prices’ short-term movements.
Why are we covering indicators?
Market Realist believes in long-term investing. Why should short-term movements matter in the first place? Well, we believe that even for a long-term investor, entry and exit timing is important. When an investor wants to invest in or sell stocks (SPY) from a particular industry—like coal (KOL)—indicators can provide valuable clues regarding whether to invest or sell right then or wait a few more days.
Thermal coal industry indicators
Currently, the coal industry is going through heightened volatility. As a result, it makes even more sense for us to cover the short-term indicators. We shouldn’t just focus on the industry’s long-term aspects.
Over the long term, the industry may revert back to normal because the weak and high-cost producers will go out of business if low prices persist. The supply will shorten due to more mine closures. This will lead to an increase in prices because fewer tons are available in the market.
Most of the US coal producers—including Peabody Energy (BTU), Arch Coal (ACI), and Alpha Natural Resources (ANR)—are highly leveraged. Only a handful of producers—like Cloud Peak Energy (CLD)—managed to keep their finances in check.
You may want to read Industry overview: The shifting sands of US coal production to learn about what caused some companies to have disastrous balance sheets.