A “Last Chance” Trade on Arch Coal

“Someone” really wants Arch Coal (ACI) to avoid breaking the buck.

On August 5th, ACI traded as low as a buck per share before closing at $1.05/share. Two weeks later we learned Soros had been scooping up ACI shares. Trading volume on ACI has been much higher since then.

On August 20th, ACI was back at a low of $1.00/share after a wild three months. The stock closed at $1.04. The next day, August 23rd, ACI plunged to a close of $0.84. The day after that drop, ACI rallied just as quickly to completely reverse all its losses. The stock has trickled higher ever since and seems poised to be a juicy candidate for a “January effect” trade.

Arch Coal (ACI) could be in its "final" struggle for survival as it barely averts n extended stay below $1.00/share.
Arch Coal (ACI) could be in its “final” struggle for survival as it barely averts n extended stay below $1.00/share.

Source: FreeStockCharts.com

The January effect is a well-known stock market pattern where stocks that investors dump going into the end of a year perform exceptionally well in January. Supposedly, investors who are busy trying to optimize the tax efficiency of their portfolios dump their losers before year-end in order to offset gains on earlier winners. With all the motivated sellers out the way, these same stocks find more buyers than sellers to start the year. I am not clear whether this pattern really provides consistent trading opportunities, but it makes for a good story and an intriguing backdrop for losing stocks like ACI. Interested readers can check out a related piece in MarketWatch called “Why you shouldn’t buy small-cap stocks until 2016.” Columnist Mark Hulbert quantifies the stark seasonal pattern in small caps that strongly favors out-performance in January. Hulbert averages data from 1926 to 2015.

ACI is all the more interesting because a deep-pocketed investor loaded up well ahead of the motivated sellers. I am guessing Soros was not fast enough to avoid the current losses and is still waiting on a catalyst to make his position profitable. The odds seem to be fading, but the large stake makes me favor buying scenarios for ACI. This latest escape from breaking the buck seems to be effectively one last chance for ACI to work. The straightforward trade here is to buy now and bail if ACI closes below $1.00. A more aggressive or risk-tolerant trader could wait until a new all-time low to bail on the position. If such a sell-off happens before the year ends, the most brave speculators could choose to double-down in anticipation of some kind of rally in January.

Upside potential should be at least to $2.00 and of course could go a lot higher if ACI can somehow get over the all the debt overhang that sent the shares plunging from its last monster rally.

Be careful out there!

Full disclosure: no positions

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