Coal's Bad Signal to Stocks

Is an even worse pullback coming?

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Coal stocks got absolutely hammered this week. If heavy selling continues, it matters for markets.

On Wednesday, Arch Coal (ACI), Massey Energy (MME), Foundation Coal (FCL), and others slumped 10 to 15 percent, followed by high-flying steel companies. They rebounded a bit today, leaving Barron's to wonder whether investors are starting to separate the wheat from the chaff in the sector.

Van Eck's Market Vectors Coal ETF (KOL) is off an additional 7 percent this morning following a near 12 percent drop Wednesday.

Both the coal and steel sectors have enjoyed huge price gains this year as it finally appears slower global economic growth could head off a seemingly unending rise in everything from coal to oil to steel this year.

The FT calls coal the canary in the mine for the stock market, and includes a price chart showing the drop.

A pullback in commodities after a truly astounding run isn't unexpected. In fact, many investors say it's now more a matter of timing than retrenchment in those stocks. But the broader question for markets is this: If commodity and energy stocks, far and away this year's leaders, start to crack, can other sectors rise up to replace their shrinking market caps?

The answer is probably no, at least in the short term. Soaring energy and commodity prices are part of the problematic mix for equities. As those shares charged ever upward on a record-setting bull run, they've sapped strength from almost all other corners of the market. Retail stocks slump as consumers spend more on gasoline. Truckers face slimmer margins on fuel costs. Restaurants deal with both rising food costs and weaker consumers. Those trends won't reverse immediately. And the less said about historical leaders like housing and financials the better.

Plus, it's worth remembering that while $140-a-barrel oil is painful, a real pullback in commodity prices is a sign that the economy—both globally and in the U.S.—is still slowing. Hardly a positive. Keep an eye on the cost of pretty much everything being dug or drilled for future hints.