In a perfect world, when a stock moves higher, there's a clear reason for it. We don't live in a perfect world though. Pacific Ethanol Inc. (NASDAQ:PEIX) and BioFuel Energy Corp. (NASDAQ:BIOF) are moving higher - and even more so today - without any clear reason. There are no accidents in the market though, so the fact that BIOF and PEIX are both developing pretty well-defined rallies right now can't be dismissed as coincidence. More important, at this point, traders should be taking the budding rallies at face value, and assume there's some reason for the new strength, even if it's not clear yet.
If it all seems vaguely familiar, it might be because yours truly made a similar point a week and a half ago. Though no news from, or really even about, Pacific Ethanol and BioFuel Energy has materialized since then, charts of each stock in the meantime have affirmed trade-worthy action is on the table.
Of the two, BIOF is further along the quality-setup scale. It crossed above its 200-day moving average line yesterday, putting the finishing touches on what's become a long string of higher highs and higher lows. Just as critical is the fact that we've continued to see strong volume behind the biggest and best days of the ascension.
PEIX isn't quite as far along. In fact, Pacific Ethanol Inc. hasn't even made its way above the critical 200-day moving average line, though it's been testing that 200-day line for a couple of weeks. And like BioFuel Energy Corp. shares, the volume on the way up has been noticeably better than the recent average. If this morning's pre-market action holds up, then it'll get over that hump today.
Part of the reason the market is becoming bullish on ethanol stocks again is chatter about the EPA raising the required amount of renewable fuels made each year. That was the same chatter from a week and a half ago though, and there's been no progress on the front since then. Nevertheless, hope of new regulation is sometimes enough to prod stocks in advance of any actual new regulatory requirement.
Perhaps the revival of Pacific Ethanol and BioFuel Energy shares is stemming from the way corn prices are falling now. Corn is still relatively expensive at $6.93 a bushel, which means corn-based ethanol is still relatively expensive to make. But, considering corn was priced at a high of $8.43 per bushel last August, it's at least back to palatable levels.
Critics of that concept will be quick to point out that ethanol prices have fallen too, from a peak of $2.70 per gallon in mid-2012 to $2.33 a gallon now, this wiping away the benefit of cheaper corn. It's not a dollar-for-dollar relationship though - producers like BIOF and PEIX can clear more profit per gallon when-and-if corn is cheap (or cheaper).
So the reason? Nobody really knows. Yet, it can't be denied that these stocks are moving, even if the reason isn't clear.
This is one of those times that traders simply need to trust what the market is telling them... that there's a light at the end of the tunnel for ethanol stocks. Thing is, the market has a funny way of being right about these things, with the actual reason coming to light well after the fact. Waiting until then to buy, however, means you've waited too late.