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Alternative energy mutual funds and ETFs have pulled back from some of the fantastic gains seen in 2013. There is a saying in the investment world that "as goes January, so goes the year." Is it time to bail on this sector, or on stocks in general? Perhaps, but wise long-term alternative energy investors should avoid rash steps at this juncture.

Alternative Energy Fund Returns

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Mutual Funds are down about 4% on average year-to-date, and are basically flat for the past three months. Despite this, alternative energy mutual funds are up 22.7% in the past year, and not a single fund is trading in the red.

By far the best performer in the past 12 months is Firsthand Alternative Energy (ALTEX), up 75% for the year. Most of the stocks the fund holds are in the high-flying solar sector, including SolarCity Corp (NASDAQ:SCTY), SunPower Corporation (NASDAQ:SPWR) and GT Advanced Technologies Inc (NASDAQ:GTAT).

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Exchange Traded Funds are only down 0.9% on average. If the outlier iPath Global Carbon ETN (NYSEARCA:GRN) is removed, however, then ETFs are down more like 1.6%. On the other hand, the 17 alternative energy ETFs posted a strong showing in the past year, up 34% on average. Not surprisingly, two solar ETFs have had the best one-year returns - Guggenheim Solar (NYSEARCA:TAN) and Market Vectors Solar Energy ETF (NYSEARCA:KWT).

The lowest performing funds on an annual basis are Global X Lithium ETF (NYSEARCA:LIT) and Market Vectors Rare Earth/Strategic Metals (NYSEARCA:REMX). These two funds reflect the dip in basic materials markets, which mostly reside in developing countries. Investors have soured on emerging markets of late, betting on lower growth in China. The logic goes that since China is the world's manufacturer, and thus the largest market for these materials, a slump in China will cause a large economic drag for this sector.

Where We See Opportunity

One fund where we see opportunity is Allianz RCM Global Water (AWTAX), which has risen to a Rank 1. This environmental services fund has decent returns at relatively low risk. Its stock fundamentals are strong, and it has moderate management fees. AWTAX is trading fairly low relative to its annual price range, so this looks like a good entry point.

iPath Global Carbon ETN, which tracks the Barclays Global Carbon Index, has finally had a lift. Gains started occurring in April of 2013, then accelerated just after the new year. This reflects the fact that beleaguered carbon markets have been digging themselves out of a bottom. Despite these developments, it may be years before a viable carbon market reemerges.

As Goes January?

So let's take a closer look at that saying "as goes January, so goes the year." True, the S&P 500 is down over 5% for the year so far, which is spooking investors. A quick look at the facts, though, makes me think there is less reason to worry about than the slogan implies.

Looking at historical data for the S&P 500 back to 1950, there is a very high correlation of market direction for the month of January and the rest of the year. 70% of the time, if the market was up in January then it was up for that year, or if it was down in January it was down for the year. Of the 45 years that there was a correlation, however, 32 of them were in an up market, and only 13 had a down correlation. So the trend is much truer for an up January than a down January. Even more interesting, though, is that when the S&P 500 was down in January, it finished trading up for the year 16 times. In other words, a down January predicted an up year more times that it predicted a down year. Though past behavior does not always foretell the future, I would not be too worried about stock market losses in January predicting a down year for 2014.

Source: As Goes January? What The Pullback In Green ETFs, Mutual Funds Means