2009 – The Market, Solar Stocks and Volatility

I have received a number of e-mails regarding my opinion concerning the stock market, solar stocks and my numerous past references to increased market volatility and the extremely high volatility in the solar sector. FYI – 2008 was the 4th most volatile market in history, only 1931, 1929 and 1932 were more volatile.

The Broad Stock Market

As most everyone knows 2008 was certainly one of the worst years in history for the stock market in general. The Dow Jones was down 31.1% for the year, which ranks as the 6th worst year in history. I always find it informative and interesting look at history to give me a perspective when such a significant event occurs.

Take a look at the tables below:

Ten Worst and Best Years for the Dow Jones Industrials








Yearly return


Yearly Return



















































It is interesting to note that when the market goes to extremes (either plus or minus), it tends to correct to the opposite extreme. It appears to build up momentum in one direction and when it turns and reverses, it overshoots in the opposite direction

For example: Four of the worst years ever were 1929 (-17.17%), 1930, 1931 and 1932 which are generally known as the great depression years. However look at the two best years in history, 1928 and 1933. One year (1928) was the TOP of the bullish extremes of the 1920’s and the other (1933) was the explosive momentum off of the 4-year bear market of the great depression, which continued up (1935) until this extreme, too, was corrected in 1937.

The next serious down period was the recession of 1973 (-16.58%) through 1974 which was reversed by the strong gains of 1975.

Most recently we all experienced the “technology bubble” of the late 1990’s and the terrible crash in the technology heavy NASDAQ exchange. The NASDAQ index fell -39.3%, 21.1% and 31.5% in 2000-2001 and 2002 only to rebound UP 50% in 2003.

This strong rebound in 2003 set the stage for the long bull market of 2003 – 2007, which ended in October of 2007 and resulted with the NASDAQ down 40.5% and the S&P 500 down 36.1 percent in 2008.

What is to be learned from this mini stock market history lesson?

  1. History does seem to repeat itself.

  2. For some reason, it appears that we and the market never seem to learn.

  3. The reasons why we never seem to learn are in my opinion are very simple and oh so easy to forget: fear (stock market bottoms) and greed (stock market tops).

What does this tell us about the present situation? It tells me that we are firmly stuck in the “fear” part of the cycle. In this case, among the things, it is being driven by:

  1. Uncertainly as to: Does anyone really know what to do now? This accounts for the historically high volatility in the market in 2008 and January of 2009. The market hates uncertainty and that is all it is getting.

  2. Lack of trust in the banking system and therefore a resulting credit crisis. This is one of the primary problems the solar industry is encountering now, i.e. project funding has stopped or is suspended in many countries around the world.

  3. The housing collapse and the resulting nationwide mortgage/debt situation.

How do we get out of this terrible situation?

First, the GOOD NEWS:

  1. We have the Great Depression and the Japanese real estate crisis of the 1990’s as an example of what not to do. In the depression the U.S. government reacted too little and too late, thereby greatly prolonging the situation. In Japan they lowered interest rates too slowly and the crisis got out of control.

  2. We have a new administration that is staffed with smart, experienced people who are students of past financial crisis’s and should be best equipped to deal with it.

  3. The first steps have been the correct ones – the government moved quickly, aggressively and with significantly more money than governments did in the past with crisis’s of this magnitude.

  4. I think we have averted a total crash of the financial system and are now on the road to a long slow recovery.

Second, the BAD NEWS:

  1. This is a very serious and complex problem and will not just go away by itself. It will take time and patience.

  2. Even though the Japanese real estate crash was worse than the current one in the U.S. (hard to believe, but true) the Japanese had a huge buffer because of the very high personal savings rate in Japan, unlike the U.S. in which personal saving is very low and debt is high.

  3. I think we are still in a bear market. Looking at the numbers in the beginning of this article I think it is clear that when you have multiple years of stock market good years it is usually followed by more than one bad year. As a result, I think we have seen the bear market bottom in November of 2008. However, I think we will see a series of bear market rally’s before we see the start of a new bull market.

  4. This will remain, in my opinion, a stock pickers market. There will always be areas of the market that are doing well and an investor will have to be vigilant and nimble to catch those areas and also be prepared to exit quickly when the favorable winds shift.

The Solar Stock Market Segment

Unfortunately the solar industry has been the victim of a number of negative influences simultaneously:

  1. The 2- or 3-year long silicon shortage that drove solar stocks over the past few years has turned into a significant silicon surplus, causing a drop in silicon prices resulting in a drop in panel prices.

  2. As a result of #1 solar companies are experiencing margin pressure on their panel business.

  3. The current financial crisis, specifically the credit crunch, has resulted in a large number of projects being canceled, postponed or scaled-back due to lack of financing. This will result in an excess build-up of inventory and significant pricing pressure on companies to control their inventory.

  4. Solar stocks were the “high fliers” of 2005, 2006 and 2007 in that they far outperformed the general market. But in 2008 solar stocks were down 76% on average, over twice the decline of the general market. Sound familiar? Individual stocks, industry segments and the market in general always go to extremes and at some point correct these extremes with a swing to the opposite extreme.

  5. Finally the solar industry is basically a “start up” industry that is not yet well accepted in the general marketplace and has not fully developed its technology future in any of its market sub-sectors. It is too bad the industry had to go through this phase of its development when all of these other “problems” outside the industry were occurring.

What is next for the Solar Industry?

The next phase of development for the solar industry is the same phase that all new industries went through — autos, semiconductors, computers etc. It is the consolidation and shake-out phase.

The industry without question has a very bright future. However, as in all new industries the strong will survive and the weak will be acquired or go out of business. New technology will emerge and new leaders will distance themselves from the pack. This is nothing new and not unique in any way to the solar industry.

What can investors expect?

Investors can expect very erratic movements in solar stocks until the overall market volatility starts to get back to the “normal” range.

** Note: if you go to the new financial section on the website and put in the symbol $VIX, you can see a measure of market volatility. Click on “chart” at top and pull up a two year picture. As you can see the “normal” range for $VIX was between 15 and 30 in past years. Late 2008 and early 2009 are clearly at historical highs. Until the VIX settles down I think you will see this erratic market continue.

With all of this said is there a way to look at solar stocks today and try to “pick” the ones that have the most potential?

Once again, it is impossible to accurately determine which will be the winners and which will be the losers. However I think that there are at least three areas an investor should look at that I would consider to be critically important. If a company possesses all three of these characteristics, it would have much higher probability that it will be a leader in the next phase of the emerging solar boom.

First: Cash is king. An investor will have to make sure to check each potential company’s balance sheet and be sure that they have adequate cash reserves to carry them through at least 2009 without need of further financing.

Second: Look at relative strength. In periods like this, good stocks and bad stocks both are carried down with the general market. However, the better stocks generally drop last and come back (when the tide changes positive) first. These stocks will also most likely be the ones with the most cash (best financial shape) therefore with the best future prospects. As a result, an investor should look for the solar stocks with the highest relative strength compared to the general market — they will be the early leaders in the next market stage and the first to break above their 50 day moving averages (see below).

One of the simplest short term methods I have used over the years to determine trading points for stocks (and the market in general) is the 50-day moving average. To summarize:

  1. If a stock is trading over its 50-day moving average it is in an uptrend.

  2. If a stock is trading under its 50-day moving average it is in a downtrend.

Third: Check out product differentiation. With a new industry like solar, the longer term leaders are generally the companies with some form of competitive advantage or product differentiation. Remember these companies may have innovative products, but they must also pass the first two hurdles (cash and relative strength) in order to warrant further consideration as an investment.

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 energy: www.sunseries.net.

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I have worked, for 33 years as an independent analyst and investor in small emerging technology companies. I have been actively involved in following developments in the renewable energy sector since 1977 and am regarded as an expert in this field. I was the contributing editor for the past 17 years to the Photovoltaic Insider Report, the leading publication in Photovoltaics industry that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. I currently am a consultant to a number of technology and solar related companies. I can be reached via e-mail at: solarjpl@aol.com. Visit my website for the promotion of solar energy - www.sunseries.net

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