Solar and Oil, Part Deux

So...I wrote about a break in the correlation between oil and solar stocks the day before oil takes a major tumble that crushes solar stocks at the same time. The one-day massive move on September 2 did not re-establish a correlation, but it was jarring nonetheless. All sorts of stops and targets triggered, and I am still trying to sort out the meaning of the action and make plans for the next month or so. At times like these, I find writing to be a great organizing and clarifying tool. I will focus here on explaining my short-term positioning in various solar stocks since I did not do so the last time. Note again that I am long-term bullish on solar, and I have made no changes in those positions. What I describe here are short-term positions.

Suntech Power (STP)
STP has ripped upward since reporting stellar earnings two weeks ago. Shares short soared back to 52-week highs going into earnings and no doubt a lot of the lift in the stock has come from short-covering. STP has since stumbled twice, the last hiccup happening right at resistance from the 200-day moving average [DMA] and congestion formed around the April and May highs. These highs were formed as resistance formed from the congestion areas formed in January and February (not fully shown in the chart below). In other words, the odds were high that STP would fail once again to conquer these levels. I was a bit early in establishing the short, but my cover was triggered on Tuesday's sell-off. Short-squeeze not withstanding, I still consider STP a short from a technical perspective until it can overcome this tough resistance. I am leaving in play calls that I snagged as a small hedge.

[click to enlarge]

Sunpower (SPWR)

SPWR is currently my favorite solar stock for short-term positioning. Unfortunately, I was very late on moving on this one. On July 31, I closed out the First Solar (FSLR) earnings play with a nice (but very risk-laden) profit and noted my next target: "I am particularly intrigued with Sunpower with its high short-interest and string of recent good news." Two weeks later, SPWR annouced a huge utility contract with PG&E. I had not one share in play. I waited for a pullback and got none. I finally jumped in DESPITE the stock trading right up against resistance from the April and May highs (YES, very ironic!). Tuesday's pullback triggered a tight stop. Assuming that overhead resistance will remain intact for a while, I will now be waiting for a test of the 200 DMA and/or a filling of the August gap for my next move.

[click to enlarge]

Energy Conversion Devices (ENER)

After so many stellar post-earnings performances for this solar earnings season, I am sure a lot of traders were positioned for more fun after ENER reported earnings last week. Shorts have even been backing off ENER for the last 5 months or so (although 16% of the float is still sold short). ENER raised guidance but also raised concerns about margin guidance - a big bugaboo for solar-related companies. The stock went back to a common post-earnings pattern for solar stocks - popping right after earnings and then quickly fading. A purchase triggered in the midst of that selling as I thought it was overdone. I still hold the long position. ENER failed to break its all-time high after earnings. I think the fundamentals for ENER may prove strong enough to conquer that resistance soon. This position is very small, so I am looking to add to the position if it passes a test of support at the lower part of the recent trading range. A break of that support, and I am out. A key test is coming as the stochastics begin to indicate an oversold position.

[click to enlarge]

LDK Solar (LDK)

LDK is similar to SPWR in that it has had a strong three-week post-earnings run. Unlike the other stocks mentioned above, it hurdled its May high and is now barely positive on the year (chart not shown). These characteristics grabbed my attention and got my vote for a small speculative long position.

Trina Solar Ltd (TSL)

TSL is on a choppy downtrend that started a year ago (chart not shown). Despite having a relatively low valuation, the stock has been consistently sold post-earnings. "Something" is wrong here, and I know a lot has been written on the virtues and vices of TSL. I took on a small speculative short position mainly as a hedge to longs. These puts expire in September, and I think they will likely go out worthless at this rate.

So, overall, the results in this round of short-term solar plays are lackluster. Hopping onto SPWR so late hurt results the most because of the lost potential profit. What I have learned with solar stocks is that it only takes being right on one stock in a basket to generate good returns. Going forward, I will maintain the remaining positions according to defined support and resistance levels. However, I will look to any further selling related to weakness in oil as a buying opportunity.

My outlook on oil remains bullish despite the strengthening in the dollar. Accordingly, a buy triggered on USO (USO) on Tuesday's decline. From a technical perspective, oil is at what I call a "do or die" spot. My bullishness turns to (short-term) bearishness the moment I conclude that the market is digging in for a global recession. I think that is the only thing that will maintain the sell-off in oil. I am VERY aware that all things related to the global economy sold off hard on Tuesday, from commodities to infrastructure. Asian stocks got a very rough start to the week (post-Olympic trading has not provided China any stock-related relief). I hope to write about this soon using DryShips (DRYS) and Fluor (FLR) as the latest examples of company execs insisting nothing is wrong with the global growth story (Click here for related commentary from execs in other commodity-related companies. Click here to see Dennis Gartman on Fast Money remind us how right he has been on the commodity sell-off. He sees even more downside across the board as institutional selling grows. Fast forward to the 13:06 mark).

Stay tuned and be careful out there!

Full disclosure: Long ENER, LDK, STP, USO. Short TSL. For other disclaimers click here.

Comments

[teletuna:]

You may be correct about the correlation, or lack of it, to oil in the first place. Many solar plays are Chinese based and China stocks are taking a bit of a breather after the Olympics. The big one of course is Suntech Power (STP).

In the case of STP in particular, it is simply forming a basic 1-2-3 pattern with higher lows at about 36, 42, and 44. Provided that it bounces off the latter resistance level, which I believe it will, it is likely to penetrate the upper limit of about 48. Once that occurs, shorts will quickly cover and drive the stock up. You can see the next level of resistance for yourself!

2008 Sep 03 11:42 AM

[gebby:]

the need for solar investment persists despite the oil price decline. governments around the world are interested in clean energy in order to address the global climate crisis.

2008 Sep 04 08:37 AM

[jbde:]

What do you say about 2 stocks with very low PEs [08 est], especially on 2009 estimates? CSIQ [10.3, 7.6] and SOLF [15.5, 10.6] ?

LDK supplies both with wafers, thus as LDK's production continues to ramp above expectations, it is providing more [than estimated] wafers to its customers. So if they can expand their production lines at a faster rate, they will show better than currently estimated revs and eps.

Now that SOLF has cooled from its massive pre-eps run, it is poised to move again - and has the revenue growth and earnings growth to back it up. Remember - all of their figures are in RMB not $ and I used a rate of 7.5 in pe calculations.

CSIQ is much more interesting as its major criticism is its low margins. Good news is that it has gotten a handle on costs related to locking in its supply chain. Even with this accomplished however, the markets still tend to relate negatively to CSIQ's habit of being extremely conservative in its estimates.

CSIQ had a strange day last Friday bucking the trend, but continues to bounce off its rising and supportive 200dma. Technically it is getting pinched by the declining 50dma and something has to give - soon! A solid close above the 50dma should propel a breakout confirmed by a daily close above 33.24 and a weekly close aboe 33.58 - just not this week.

Here's a different play - who makes the assmebly line equipment for doping wafers and module assembly? If there is a pure play, its revenues are indicactive of industry capacity growth.

It's the old pick and shovel play.

2008 Sep 04 09:22 AM