We should see an across the board rally this morning in the commodity space, and that will be a welcomed change for many. The hardest hit stocks have already recovered in the past few days from their absurd lows recently put in, but we still see value in Eagle Ford, Utica and even some Bakken plays at this time. We would look to oil, natural gas and coal to put in the big gains today and think that traders would do best to focus their attention there.
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Oil & Natural Gas
Encana (ECA) turned in an impressive day with shares rising $1.10 (5.71%) to close at $20.36/share on volume of 16.3 million shares. The company does have a lot of exposure to natural gas, even after the big asset sell-offs they did earlier and as natural gas prices rally so too shall the shares. Investors would be wise to remember that even though they are targeting wetter plays, there is still a significant amount of dry natural gas produced by those wells. All of these plays will have considerable exposure to dry natural gas for years to come, so price swings will continue to impact shares.
Risk-on seems to have appeared yesterday as shares of Cheniere Energy (LNG) rose $0.95 (7.42%) to close at $13.76/share. Historically that $13.76 level has offered us some great entry points into some big winners - complete coincidence in each case but humorous to notice when compiling your tax data cost basis. We are seeing natural gas prices coming back, but right now it is nothing for Cheniere to worry about and we still have the opinion that we will see prices once again test previous lows. There is just too much production and not enough consumption. That outlook would change with a continued switch to natural gas from coal at the utility level and/or should natural gas become a transportation fuel. All things to look at long-term, but for the short-term we like this as a trade.
The coal names continue to rally with Arch Coal (ACI) rising $0.47 (7.79%) to close at $6.50/share yesterday on volume of 16 million shares. We also saw Peabody Energy (BTU) rise $1.00 (4.49%) to close at 23.27/share on volume of 10.2 million shares. The entire coal complex performed the same way with shares rising off of the recent lows. The news lately has been good out of the industry and with the news out of Europe this morning it sure does look like we may be turning a corner when looking at the overall big picture. We will have to look over the industry this weekend to see if it is time to move into any of the big name coal companies yet, assuming we do not feel the need to do that during today's trading.
It sure looks like there is a short squeeze taking place at AK Steel (AKS) as shares have had a strong past few days. Yesterday we saw shares rise $0.25 (4.27%) to close at $6.10/share on volume of 13.5 million shares. It will be a few months out after the economy turns before these guys would rally based on their financial results, but the stock should be one of the first to lead us out of this bottom as investors bid up shares in anticipation of better days ahead for the company. We would rather play the iron ore producers than the steel makers, or possibly even molybdenum producers, but this does offer an appealing investment for more conservative investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.