🍔Pullback As Predicted + Coal Trade Setup

This hated sector is about to break out

Welcome back to MktContext where we study the US economy and time the stock market.

Current market timer: HOLD

After 9 weeks of non-stop rallying, the S&P finally had the long-awaited pullback.

The reason for the pullback? A very strong jobs report (non-farm payrolls). Good news is bad news when it causes expectations for rate hikes to jump dramatically. That’s bad for stocks.

We have been warning about the over-extended rally. In “Fever Break; Blow-Off Top Formed” we wrote:

The Nasdaq is now 10 ATR above its 50-day moving average. That is in very, very extended territory. A pullback could knock this market off its stilts at any moment. All it would take is a piece of negative news, like the DeepSeek announcement from last year or a Fed hike announcement.

A selloff could be deep if there’s no buying support at current price levels. In Wall St parlance, we call this an “air pocket”.

The strong jobs print presages a possible Fed hike announcement. That’s what spooked investors on Friday.

So what comes next? Does it rally back sharply or is this a major turning point in the market? At MktContext, we study the underlying factors and “market context” to answer these questions.

Today’s topics: coal trade, tariffs, layoffs, bitcoin and gold crash, our portfolio.

Trump supports coal

Trump announced $700M of federal funding to support 13 coal plants across the US. The funds would be used to restart a Maryland plant and build new plants in Alaska and West Virginia — the first new US coal plants since 2013. It also goes toward constructing a coal export terminal in Oakland, California.

Trump is a longtime supporter of coal. He’s previously delayed coal plants from retirement and relaxed coal pollution standards. Putting aside obvious political motivations, the country needs the energy to meet surging power demands from AI and electric vehicles.

Coal is a reliable but polluting energy that’s long been shrinking amid environmental regulations. While we support environmentalism, shunning coal is not the way to do it. Instead, there need to be incentives to “clean” coal emissions so that the US can diversify its sources of energy to include coal (along with solar, wind, nat gas, and nuclear).

Diversification helps prevent blackouts during extreme weather. It also helps withstand commodity shocks due to war. And as mentioned, we need it dearly for AI data centers. A properly diversified energy program prevents shortages like those experienced recently in Europe and Asia.

If part of the funding goes toward upgrading/modernizing coal plants, for example retrofitting with carbon capture or scrubbers, this will go a long way towards reducing toxic emissions. Ironically, it is China that is the world leader in clean coal technology due to rapid scaling and decades of innovation.

We think coal stocks are undervalued and should benefit from federal capital injection. Institutional investors are frequently restricted from owning coal stocks due to bad publicity; retail investors have the edge here.

COAL is the ETF that contains many of these stocks, but trading volume for this ETF appears thin. Individual coal-producing companies include CNR, BTU, ARLP, HNRG. Be sure to distinguish between thermal coal (burned for energy) vs met coal (used for steelmaking).

Here’s how we would play them: Several of these stocks are forming flag or multi-month consolidation patterns on the weekly charts. A flag is simply an uptrend (the flagpole) followed by a consolidation range, and ultimately the breakout. There is often a high probability/high payoff trade when these stocks break out of resistance. Alternatively, you can buy them early at the lower part of the “handle”, but the odds of failure will be higher.

ALRP flag and potential cup/handle pattern

HNRG flag and potential cup and handle setup

There are also utility companies with coal-fed plants, such as DTE (40% coal), AEP (30% coal), SO (30% coal), LNT (20% coal) though many of these operators are actively retiring coal assets.

(Not financial advice; always do your own diligence.)

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Share issuances are a red flag

An important development happened this week in Mag7 land. Google is issuing shares, its first major equity raise since its IPO two decades ago. A share issuance involves creating new shares of its stock out of thin air, which the company sells to investors in order to raise funds. The funds can be used for anything, but in this case it’s almost certainly for building data centers.

Shortly after, Meta also unofficially considered an equity issuance to finance its aggressive AI buildout. Meta is known for overspending on big money-losing visionary projects like the Metaverse. So for them to raise funds is a big problem. Given the negative stock reaction to the announcement, we think Meta will reconsider this issuance.

There is tons of academic research linking equity issuances to underperformance in stock returns. Companies with higher shares outstanding or bigger funding requirements also demonstrate weaker returns. This is empirical fact.

Equity issuances linked to stock price underperformance

Moreover, they go from buyers of their own stock to sellers. It’s a simple supply/demand equation. More demand for shares = stock prices go up. More supply of shares = stock prices go down. We’ve discussed this problem in past posts:

“The other issue with diverting all cash flow to capex is it leaves little to buy back their own stock with. Given the copious amounts of idle cash they had before, stock buybacks were previously a major source of buying support. No buybacks means no price support. This explains the Mag 7’s awful stock performance in recent times.”

-From AI Capex Overheated, Feb 22, 2026

Seeing Mag7 issue shares is extra problematic. These companies have historically been cash-rich due to their lucrative asset-light business models (meaning it requires very little funding to grow). It highlights the shift from cash-generative to cash-burning entities all because of the enormous spending requirements of the AI boom. This makes them decidedly less valuable.

It doesn’t mean we immediately short the Mag7 companies. But one by one, the pillars of fundamental support for these stocks are eroding, until there is only air underneath them. They are sowing the seeds of their own implosion later down the road.

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