Coal stocks plunged on Wednesday, as investors reacted to the news that both Alpha Natural Resources (NYSE:ANR) and Walter Energy (NYSE:WLT) cut their output estimates for 2011. Even worse, Walter said third-quarter earnings would be well below Wall Street’s current expectations.

While both companies cited specific production problems, Alpha also included this key phrase – “reduced metallurgical export shipments to Asia due to unexpectedly curtailed customer activity levels” – as one of the reasons for its shortfall. China, of course, has been one of most important drivers of demand for U.S. coal companies.

These latest announcements are just another piece of bad news in a summer/autumn period that has seen harsh declines in coal stocks. Fears about slowing global growth have weighed disproportionately on the sector – which is dependent on the fortunes of both the steel-making and power industries – and it now it faces the added challenge of further estimate reductions and likely analyst downgrades.

Below are the returns of selected coal names from their highs of early April through early Wednesday morning:

Some brave investors may be sniffing around this sector looking for a buying opportunity here. However, even with the stocks so far off their highs and valuations having come down so far in recent months, coal shares are in the same boat as most cylicals at this stage: too low to short, but still too dangerous to buy.

First, like just about every other cyclical right now, the near-term fortunes of coal stocks remains firmly rooted in the macro trade. And until the fears about the global economy subside, there is little chance coal shares will be able to sustain an extended move higher. Any purchase should therefore be viewed as a short-term trade at this point: buy shares, get your 5%, and get out before the next wave of bad news hits.

Another challenge for coal is the perilous technical picture. Using the Market Vectors – Coal ETF (NYSE:KOL) as a proxy, the sector is just a hair above its 52-week low (set in September, 2010) and is now trading below its low point of the August selloff.

Some individual stocks, including Walter, Alpha Natural, and James River Coal (NASDAQ:JRCC) are already at their 52-week lows. In contrast, the S&P 500 stands about 8.7% above its August nadir. A look at the KOL chart shows the next support at $30, which leaves another 14% of potential downside from here. Clearly, coal stocks have seen little benefit from the rising market, which leaves it extremely vulnerable if the broader indices begin to weaken once again.

The fundamental picture is no longer particularly compelling, either. Deutsche Bank recently came out with a report calling for coal output to rise only 2% in 2012. In addition, the U.S. Energy Information Administration (EIA) released a report earlier this month that said the following:

• EIA expects that coal consumption for electricity generation will decline by 21 million short tons (MMst) (2.1 percent) in 2011, as total electricity generation rises by 0.4 percent and generation from natural gas increases by almost 2 percent.
• EIA forecasts that coal production will fall by 2.2 percent in 2011 despite a significant increase in coal exports… EIA expects coal production will remain flat in 2012.
• Forecast U.S. coal exports fall back to about 87 MMst in 2012 as supply from other major coal-exporting countries recovers from disruptions.

In total, this is hardly the backdrop for a screaming buy. As a result, the best strategy now appears to be to wait it out and let the clouds dissipate.

A potential trading opportunity exists in the form of the upcoming earnings season, when a sell-the-rumor / buy-the-news trade could work once coal companies begin to report. When that time comes, focus on companies with good fundamentals – Deutsche cites Arch Coal (NYSE:ACI) and Patriot Coal (NYSE:PCX) in its report – and those with exposure to the stronger Asian market, such as Yanzhou Coal (NYSE:YZC). Walter Energy itself, which was recently rumored to be a buyout candidate, represents a potential lottery ticket for stout-hearted traders.

In the meantime, the story is the same: as long as macroeconomic issues are the main factor moving stock prices, be safe and stick with the winners. And right now, coal stocks simply don’t fit the bill.