“To read between the lines was easier than to follow the text.” - Henry James
I wanted to try a slightly different way of arguing that the Fall Melt-Up of 2011 is still in its early phases despite recent volatility and news coming out of Europe making investors question whether things are truly over yet or not. Take a look below at the price ratio of the Guggenheim Solar ETF (NYSEARCA:TAN) relative to the S&P 500 ETF (NYSEARCA:IVV). As a reminder, a rising price ratio means the numerator/TAN is outperforming (up more/down less) the denominator/IVV.
We can see by the broad downtrend that solar companies have on average been underperforming the S&P 500 since early June 2009, and effectively collapsed in 2011 as the European crisis came into focus. I say this because solar companies tend to get government subsidies to remain cost competitive to other source of energy. The industry as a whole has been punished because the idea is that those subsidies by European governments are nearing their end – there is basically no money left to support solar when everyone must support the PIIGS (or so the argument goes).
The weakness was particularly sharp in late-August and September when the ratio speed downward accelerated. Interestingly, this may have been a “capitulation” like moment for solar companies, as the ratio has stabilized since then. And here is the main point – if the recent bottoming out of Solar is real, and if you believe that the industry will still exist, then TAN likely begins to outperform broader markets. From a message standpoint, this may mean that concerns over Europe are subsiding (ratio up) rather than increasing (ratio down).
Always remember, the longer something underperforms for, the more likely it is to lead with each passing day, a/k/a mean reversion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.