Solar and Oil, Part Deux

By Dr. Duru written for One-Twenty

September 3, 2008

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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.

STP fails at resistance

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 (SPWR) 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.


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.

ENER post-earnings

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. (Late update: With an 8%+ drop on Wednesday, these puts are now on pace to be profitable - more wild solar swings).

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 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 to shipping. Asian stocks got a very rough start to the week (post-Olympic trading has not provided China any stock-related relief). Australia has finally started to cut interest rates after just a few months ago talking about fighting inflation with rate hikes. And the dollar continues to rise as the "least bad" currency.

I hope to write about some of this soon. For example, I will use DRYS and FLR as the latest demonstration 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). We all know that we can go broke waiting on corporate executives to tell us when to sell, but I like to use this kind of commentary to provide some counter-balance.

Stay tuned and be careful out there!

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

DR. DURU®, 2008