Geoffrey Ching's  Instablog

Since the early March low in the stock market, the most beaten down energy and materials industries have outperformed. Coal, solar, and steel have all outperformed the market and broad energy indices. Since March 9, Market Vectors Solar Energy ETF has gained over 55%, Market Vectors Coal ETF is up over 35%, and Market Vectors Steel ETF is up over 40%. Those are certainly huge gains when the iShares Dow Jones Energy Sector ETF has gained barely 18% and the S&P 500 has risen 26%.

The strong returns were driven mostly because these industries were driven down over 80% after participating in the speculative energy bubble. They were deeply oversold by almost any measure, so when the stock market popped upward these industries outperformed.

Market Vectors Coal ETF tracks the Stowe Coal Index. The Stowe Coal Index is a focused index. Though it includes thirty-three companies, the top ten companies make up 62% of the index. Of the top ten companies three are Chinese coal companies and one is an Indonesian company. Altogether one-third of the index is made up of foreign companies of which two-third are in China. Because coal is not a clean energy, its future is not as bright as solar energy. However coal is one of the cheapest sources of energy and is still used for many power plants.

The Market Vectors Solar ETF tracks the Ardour Solar Energy Index. The index’s top ten companies make up 63% of the index. Because of pushes for clean energy and to leave dependence on foreign oil, solar companies have a strong outlook. Last year when oil prices rose to speculative heights, solar energy suddenly became a reasonably price source of energy. Now, with the oil bubble popped solar energy is not cheaper than oil based energy sources. Many solar companies may struggle to survive as solar energy is relatively expensive.

Market Vectors Steel ETF tracks the NYSE Arca Steel Index. The NYSE Arca Steel Index is a focused index with its top ten components making up 68% of the index. With seven of the top ten components being foreign companies, it comes as no surprise that 58% of the index is made up of foreign companies. The outlook for steel is steadier than the outlook for coal or solar energy. Steel is likely to recover with the economy, while coal and solar energy may not recover if oil prices do not recover.

If the recent rally in the stock market turns out to be a bear market rally, then all of these ETFs will likely drop more than the stock market. If the rally continues they may continue to outperform broader indices.