Update on Solar Stocks: Market Rebound?

Good question, Claude.  I wish I knew for sure, but here is what I think at the moment.

Solar Stocks

Briefly, I think that solar stocks have recently gotten ahead of themselves.  One month ago, all 21 stocks I follow were below their 50-day moving average.  As of Friday the 31st, 10 of the 21 stocks are above their 50-day moving average. As you can see below, a number of stocks have moved up considerably in the last 30 days.  As a result, I think we will see them entering a correct phase next.

However, if you look more closely at the underlying technical aspects of the strongest stocks you will see something very interesting.  Of the 10 stocks above their 50-day moving average, 7 of the 10 are Chinese solar companies.

 What this suggests to me is that investors may be thinking that:

1. The recent Chinese government subsidies are very positive and
2. Chinese companies have the best chance of being low cost crystalline silicon producers.

This in turn relates to your First Solar comment.  I think investors may be starting to realize that although FSLR is a great company and has been the industry low-cost leader, that it should not command quite as high a price-earnings (P/E) ratio premium to the rest of the industry as they once thought.  This may become another example of what I have spoken about before — good company/bad stock. I think you may see FSLR (the company) continue to do well, but FSLR (the stock) continue to languish because of this recent downward pressure on module prices, which decreases FSLR’s price advantage over crystalline producers. This pressure will also inevitably result in lower margins industry wide, something I have been warning readers about for months.

Bottom Line:  I continue to think the solar sector is one that has to be approached from a traders mentality — not one of a “buy and hold” longer term investor. The industry is still too young and the volatility is still way too high.

The General Market

As I said back on March 17, 2009:

The current market is extremely technically “oversold” (i.e. beneath its 200-day moving average). In fact, it is more technically oversold than any time since 1930, JUST BEFORE the market moved up 48% in the 1930 bear market rally.

Nothing is 100% for sure, as we all know. But I think we are either at a significant bottom or very close to it. Everything is so “oversold” at this time, that I think the worst case is that we get a significant rally in what could still be a bear market.

Keep in mind that all the bad news out there is in media now. We already know all the bad news. Remember that the stock market is actually a discounting mechanism that looks out 6 to 9 months into the future. We do not need good news to turn the market around, only less bad news.

All of this has turned out to be accurate and the market has been kind enough to let me appear to be prescient for the moment.

But now that we are entering August — what does it look like now?

At the current time I have to say a number of things about which I feel reasonable confident, especially since my emotions (usually wrong) tell me the opposite.

1. I think the market bottomed on March 9th 2009
2. All of my technical indicators tell me the market is on solid footing.
3. There is still plenty of fear (think: market bottoms) around, so there is probably more to go on the upside.
4. A number of economic indicators I follow seem to be telling me that the recession ended in July — give or take a month or two.
5. In addition, remember that the market-bottoms generally lead recession-endings by 3 to 6 months. So if the market did indeed bottom on March 9th then the recession could end as early as June or as late as September. The same timeframe as the economic indicators seem to point to.
6. Also keep in mind that the actual end of a recession is usually not “officially” declared by the NBER (National Bureau of Economic Research) until a number of quarters have passed. So we may not actually hear “officially” that the recession ended until late this year or early 2010.

Bottom Line:  I think the worst has passed and that the market is currently on solid technical ground.  However, both the Dow Jones and the S&P averages are currently significantly extended above their 50-day moving averages, so I would not be surprised to see a near-term correction. Also keep in mind that unemployment and corporate earnings are lagging indicators — so they will continue to get worse for the next quarter of two, even thought the recession may have ended. Since this current recession was so severe and so unprecedented it may have additional surprises in store for us. But at the moment the market appears to be on solid footing.

Mr. Lynch has worked, for 32 years as a Wall Street security analyst, an independent security analyst and private investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for 17 years to the Photovoltaic Insider Report, the leading publication in PV that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He is currently a private investor and has from time to time been a financial/technology consultant to a number of companies. He can be reached via e-mail at: SOLARJPL@aol.com. Please visit his website for the promotion of solar and wind energy — www.sunseries.net