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The Power of the Energy Coal Industry Group in 2022

After a market decline like we saw in January and February and the market follow-through day we got two weeks ago, my instinct is to focus on market relative strength. That means focusing on Industry groups and stocks in those groups that have held near their highs.

The mistake most investors make is to focus on beaten-down stocks. They claim that the market is handing them a discounted gift of a stock that led the market in the previous rally. The reality is that the market is discounting inventory it couldn’t get rid of in the last bull market. It is like a retailer that discounts the orange shirts; they couldn’t sell last summer. The retailer will discount the shirt by 25% and see how many takers they get. They will proceed to lower the price until all the inventory is gone. The popular blue shits sold out at the full price.

The market is a discounting mechanism that works the same way. Stocks use a similar supply and demand curve learned in Microeconomics. Of course, the supply curve for stocks would be a vertical line set by the shares in the float.

If you want something in demand, get ready to pay for it. The most outstanding stock winners of 2022 will not come from the bottom of the pack; they are the ones where accumulation exceeds supply and demonstrate relative price strength.

The industry group that is showing these characteristics the strongest is the Energy Coal group. As the market continued to sell off this week, the Coal group broke out on massive volume. The Coal group used the January selloff to put the handle on a textbook 4-month cup-with-handle base.

The Energy Coal industry group is showing the kind of price behavior that has led to the most significant market leaders in the past. Focus on Coal stocks like Warrior Metallurgical Coal (HCC), Suncoke Energy Inc. (SXC), and Alpha Metallurgical Resources Inc. (AMR) if you are interested in what will make the most outstanding returns in 2022.

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