It is our belief we are going into a stock picker's market over the next month or two and exiting this general market rally. We still think the market is due for a bit more of a pullback but would look for it to build a level for which to then move higher from into the close of the year. That is what we have come up with overnight so over the next few days we will be analyzing all of our watch lists and getting back to individual plays rather than industry-wide plays which we recently got into. We are still bullish all things Utica and the like, however we recognize that all stocks involved there will not rise in tandem necessarily so we shall pick the names we believe will. If we are bearish an industry, that will still be grouped as a 'stay away' sector but bullish calls will most likely be singular moving forward over the next few weeks.
We made our comments yesterday about waiting for the coals to bottom out and mentioning Alpha Natural Resources (ANR) and Arch Coal (ACI) and found it interesting just how much of an impact the President's crusade against coal as well as cheap natural gas prices have had on the overall economy. These two companies have closed mines and cut production in an attempt to help stabilize the price of coal and balance the market, but in doing so they have also hurt both the top and bottom lines at the railroads, and the guidance in that sector is not exactly rosy after that revelation. It has taken awhile for this to 'trickle down' to the railroads, and looking there will not tell us if coal is turning as there is a delay but it might provide for a secondary trade to leverage up when we do see coal stocks rebound. This is just a thought for our speculative commodity readers who are not afraid of margin or leveraging an idea to cover all the moving parts.
Part of our China trade was Vale (VALE) and the stock has managed to hold in strongly after the large rally sparked by Bernanke and the Fed with the QE3 program. This has partly been due to analysts revisiting their opinions on the company and reaffirming and a general bullish view on China being able to spend its way out of the current funk they find themselves in via their stimulus plan. It has worked before for China and it will work again, however we think that they will have to increase their overall stimulus spending to really push GDP growth higher as they are not a small economy anymore, but a big one. We would look for focused spending on certain manufacturing industries to come into the news in the next few months as China looks to put laborers back to work. Things are not at all good there, and the recent demonstration the country allowed in the streets against a friendly Japan shows that the government sees the need to allow the citizenry to blow off steam.
Another name that has been holding in strongly is Cliffs Natural Resources (CLF) which has benefited from the China news and the rally in commodities in general. It is highly leveraged to commodities China consumes a great deal of and that is why we have recommended it as a way for readers to play a rebound, but the strength has us wondering if we need to make it a permanent member of the China Trade we have been discussing lately in our articles now that readers should have been stopped out of their last shares of another name. The last earnings report was pretty weak, but that does not equate to future performance and we are adding this to our watch list to add to recommendations for readers to play a Chinese economic turnaround.
Some might think that steel is the way to play the rebound in world economic growth and China's as well, however with the recent news from AK Steel (AKS) and the price action (it fell another $0.25 to close at $5.30/share yesterday) we think that it is best to wait for that part of the trade to materialize. Although the leverage is there for these stocks to really move higher, we think most of the gains will be muted as the industry lacks pricing power and there is extra capacity just sitting idled on the sidelines right now. We need to see actual proof that a recovery is in process worldwide before we would become bullish on the industry as a whole, but for those who have emailed us on this topic this is how we feel right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.