The Ultimate Ugly Contrarian Play

They always say you should buy when there is “blood in the street.”  They also say, “buy them when nobody wants them.”  So, let’s consider today what could be the most unloved, bombed out, everybody hates it “thing” in the world – coal.

Ugh, just the mention of the word coal elicits a recoiling response.  “Dirty energy!”  “Climate change inducing filth!” “Ban coal!”.  And so and so forth.  And maybe they have a point.  But “they” also say “facts are stubborn things” (OK, for the record, I think it’s a different “they” who says that but never mind about that right now).

So here is a stubborn fact: coal supplies about a quarter of the world’s primary energy and two-fifths of its electricity.  As I write, two of the fastest growing economies (at least they were as of a few months ago) – China and India – are not only heavily reliant upon coal for energy, but are still building more and more coal-fired plants.  Now I am making no comment on whether this is a good thing or a bad thing but the point is, it most definitely is a “thing.”

So however one feels about coal, the reality is that it is not going to go away anytime soon.  Does this mean it will “soar in value” anytime soon – or even ever for that matter?  Not necessarily.  But as an unloved commodity it’s sure is hard to beat coal.  And as “they” (they sure are a bunch of know it all’s they?) say, “opportunity is where you find it.” 

Ticker KOL is an ETF that invests in coal industry related companies.  And what a dog it has been.  Figure 1 displays a monthly chart of price action.  Since peaking in June 2008 at $60.80 a share, it now stands at a measly $6.29 a share, a cool -89.6% below its peak.  And like a lot of things it has been in a freefall of late.

Figure 1 – Ticker KOL Monthly chart (Courtesy AIQ TradingExpert)

So, is this a great time to buy KOL?  That’s not for me to say.  But for argument’s sake, Figure 2 displays a weekly chart of KOL with an indicator I call Vixfixaverageave (I know, I know), which is a version of an indicator developed a number of years ago by Larry Williams (Indicator code is at the end of the article).

Figure 2 – KOL weekly chart with Vixfixaverageave indicator (Courtesy AIQ TradingExpert)

Note that Vixfixaverageave is presently above 90 on the weekly chart.  This level has been reached twice before – once in 2008 and once in 2016.  Following these two previous instances, once the indicator actually peaked and ticked lower for one week, KOL enjoyed some pretty spectacular moves. 

To wit:

*Following the 12/19/08 Vixfixaverageave peak and reversal KOL advanced +252% over the next 27.5 months

*Following the 2/19/16 Vixfixaverageave peak and reversal KOL advanced +182% over the next 23.5 months

When will Vixfixaverageave peak and reverse on the weekly KOL chart?  There is no way to know.  One must just wait for it to happen.  And will it be time to buy KOL when this happens?  Again, that is not for me to say.  None of this is meant to imply that the bottom for KOL is an hand nor that a massive rally is imminent.

Still, if there is anything at all to contrarian investing, its hard to envision anything more contrarian that KOL.

Vixfixaverageave Calculations

hivalclose is hival([close],22).  <<<<<The high closing price in that last 22 periods

vixfix is (((hivalclose-[low])/hivalclose)*100)+50. <<<(highest closing price in last 22 periods minus current period low) divided by highest closing price in last 22 periods (then multiplied by 100 and 50 added to arrive at vixfix value)

vixfixaverage is Expavg(vixfix,3). <<< 3-period exponential average of vixfix

vixfixaverageave is Expavg(vixfixaverage,7). <<<7-period exponential average of vixfixaverage

Jay Kaeppel

Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author.  The information presented does not represent the views of the author only and does not constitute a complete description of any investment service.  In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security.  The data presented herein were obtained from various third-party sources.  While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets.  Past performance is no guarantee of future results.  There is risk of loss in all trading.  Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance.  Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.