2 Sectors Headed for a First-Quarter Slump

Traders may want to avoid coal and steel names in the first quarter

Dec 24, 2014 at 10:52 AM
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The SPDR S&P 500 ETF Trust (SPY) is on pace to close out 2014 with a roughly 13% advance, and if past is prologue, the exchange-traded fund (ETF) could be poised to extend these gains in the first quarter. According to Schaeffer's Senior Quantitative Analyst Rocky White, since 2009 -- the start of the bull run -- the SPY has averaged a first-quarter return of 3.7%, and is positive 83% of the time. While some sectors have followed in these bullish footsteps, coal and steel are two sectors we track that don't always start the year off in a favorable fashion.

SPY Quarterly Returns Since 2009

Stocks in the coal sector have a median loss of 3.7% in the first three months of the year, looking back to 2009. Additionally, just 43% of the equities we track have finished the first-quarter in positive territory. As a point of comparison, the coal sector posts a median third-quarter gain of 9.8%, with 52.5% of names settling in positive territory.

One name of notable interest is Peabody Energy Corporation (NYSE:BTU). The stock has surrendered 60% of its value in 2014 -- including a 16.3% plunge in the first quarter. More recently, the shares have been lingering in 11-year-low territory, and were last seen trading near $7.77.

While put players have been active in the equity's options pits, there are still pockets of optimism found around the Street. Among covering analysts, 56% maintain a "buy" or better rating, and the average 12-month price target of $15.76 more than doubles the equity's current price. Should the shares extend their negative price action into the new year, a round of downgrades and/or price-target cuts could create a fresh wave of selling pressure.

The steel sector also tends to struggle at the start of the new year, posting a median loss of 2.7% in the first quarter. What's more, of the stocks we track in the sector, just 45.1% have been positive in the first three months of the year. For the sake of comparison, the same sector has a median gain of 14.3% in the fourth quarter, with three-quarters of the equities we follow in positive territory.

In the first quarter of 2014, steel name AK Steel Holding Corporation (NYSE:AKS) shed 12%. The stock has extended these declines, and is now staring up at a 31.3% year-to-date deficit to trade at $5.64. Pressuring the shares lower in the latter half of the year has been their 40-day moving average -- a trendline that swiftly contained last week's shipment-induced upside.

Not surprisingly, sentiment is skeptical toward a stock that's underperformed the S&P 500 Index (SPX) by more than 33 percentage points over the past three months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), AKS' 10-day put/call volume ratio of 0.49 ranks in the 92nd percentile of its annual range. Simply stated, puts have been bought to open over calls with more rapidity just 8% of the time within the past year.


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