Investment Markets

Stock market, bonds, currencies and commodities. What's happening and how they work.

Coal smoked

Alpha Natural Resources may file for bankruptcy after competitor Walter Energy filed for bankruptcy in early July. Mines are being sold for virtually nothing as the coal industry is under substantial pressure.

Big declines in commodity prices are undermining thousands of producers around the world. Exploration companies are profoundly affected as the ability to raise money with no revenues is affected by investor indifference.

Coal and coal market E.T.F. Market Vectors Coal (KOL) have been in a long and deep downtrend. KOL has lost nearly a third of its value in 2015 and is now down 79% from the July 2011 high.

Investors can avoid declines in securities like KOL by executing sells based on objective signals including useful predictive indicators. See them in action using the promo code summer (choose monthly subscription option).

How investors knew energy stocks were going lower

Managing risk is the most significant element to successful investing in the stock market. Here's how investors who understand how the stock market works avoided a huge decline in energy stocks.

The financial markets are driven by big investors. In the stock and bond markets, it's primarily mutual funds and pension funds. When you recognize what their investment stance is you can presume it isn't likely going to change in the short run. Of the few investment cliches worth anything, "the trend is your friend" is a good one!

The key to recognizing the severity of the condition in oil and gas and energy stocks, was revealed in the first leg down. Using the chart below, we can see how this energy stock fell. There are several characteristics of the decline, primarily;

  • no attempt to rally
  • prolonged period in the decline and
  • the depth of the decline.

The percentage loss is the most significant characteristic as most energy stocks, including Apache (APA), fell a very long way. This matters as it shows big investors had little interest in coming back into the market regardless of the depth of decline. They were effectively heavy sellers for months even as prices continued to carve out substantial losses from the mid 2014 peaks.

Power Persists

Understanding the stock market starts with recognizing extremes in power. A big decline is likely to be followed by more selling. This is precisely what happened with energy stocks as another round of selling started May 2015. You can see it in the chart below marked by B.

Notice how the break down is equally weak to the first leg down in the overall downtrend. Since mutual funds and pension funds can't unload their entire position in a short period of time, they tend to follow up later.

The chart below shows the long term downtrend from the peak in early 2011. A sell signal was apparent in the summer of 2011 as an attempt to consolidate failed. Notice how the selling at that time was very heavy and defined a clear change in behaviour by the stock and investors in the stock. Typically, the action is similar throughout a sector as was the case with energy stocks.

There was no follow up buy signal in energy stocks. You can find periods when there are rallies, but energy stocks were laggards compared to other stocks and sectors in the stock market. Weak relative strength is a significant tip off to what comes next.

Investor Boot Camp Online provides buys and sells to subscribers based on an extensive screening process. The screening process starts with an evaluation of all possible indicators, then it is followed by a screening of stocks and E.T.F.'s.

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Commentary including ideas, historical and other market indications are not investment advice. Statistics and other data may be from other sources and may be inaccurate or incomplete. See Full Disclaimer.

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