As anyone who has even a modicum of interest in the financial markets can attest, the energy sector has been a brutal one for those holding long-term investment positions. The most obvious symptom of the deflationary malaise in energy is of course rapidly declining oil prices. Year-to-date, the international benchmark Brent Crude Oil is down 25%, despite it gaining an equivalent percentage move in late August before entering into its present consolidation phase.

But few energy markets have fallen prey to as prolonged bearishness as coal. Since January of 2008, the price for a pound of Australian thermal coal fell by 37%. The commodity made a strong comeback in late 2010 to early 2011 during the height of inflationary fears that also saw the precious metals complex -- in particular, gold and silver -- rise to either all-time nominal or multi-year records. However, the coal rally was short-lived and since that ephemeral spark, it has never really regained its footing.

If the underlying asset looks bad, it's a much more horrific case for the coal mining companies. The industry is littered with failed efforts and bankruptcies, with the most recent example being Alpha Natural Resources, Inc. (OTCMKTS:ANRZQ). Even Alpha's competitor, Peabody Energy Corp. (NYSE:BTU), while not in bankruptcy mode, may only be delaying the inevitable. Since peaking in June of 2008, BTU shares have evaporated more than 98% of market valuation.

Under a contrarian mindset, however, bad news is good news. If the logic were to play out further, it could be argued that coal is a great industry to invest! But is that really the case? Is there an opportunity to be had here or is the news simply too bearish for even the most daring of contrarians?

The pros and cons of coal investing is stark to the point of vulgarity. The bullish argument is that coal has finally reached a bottom -- too many miners are being put out of business and the price must come up as a result of supply demand equilibrium. The evidence that this dynamic is playing out is the performance of coal miners for the month of August. From the 17th until the 31st, shares of Alpha Natural Resources jumped more than 81%, while the Dow Jones Industrial Average dropped 5.8%. While it's not unusual for certain stocks to buck the trend in the major indices, did anyone expect it from a bankrupt company?

Is Dinosaur Industry Coal Making A Comeback?

The bearish case is fairly straightforward. Recent events in the coal mining industry are nothing more than a dead-cat bounce, one that is virtually guaranteed to resume its negative trajectory. Based on historical performance, it can mathematically be argued that the coal market has roughly a 20% chance of recovery over the next three months. But throw statistics aside for a moment -- would anybody want to gamble on an industry that is gradually being sidelined in favor of cleaner and more efficient energy sources?

Ultimately, coal appears to be a short-term trading opportunity. The technical charts show a rising level of support, and this typically signals a reversal. However, the fundamentals for coal are so poor that it would take a brave investor to ride a position for longer than a few weeks.