Tuesday, March 20, 2012

The Bottom in Solar Shares

Today the long awaited preliminary results of the US Commerce Department's investigation into unfair trade practices by Chinese solar companies were released. While the Commerce Department's investigation hasn't yet concluded, and a decision on the charges of dumping by Chinese solar companies hasn't been made yet, they said today that "countervailable subsidies are financial assistance from foreign governments that benefit the production of goods from foreign companies." You'd think this is a good thing for US solar companies, after all this should boost their margins as they see higher module prices in the US. You might think the beaten down, and heavily shorted, shares of FSLR and SPWR would squeeze on this sort of news. But in fact, just the opposite happened. Shares in Chinese solar companies (eg. STP, JASO, YGE) surged 10-20% on the news today while FSLR languished in the red and SPWR sold off 7.5%. Wall Street was clearly looking for larger tariffs on Chinese modules with one analyst claiming that the 3-5% tariffs are too small to be meanginful. I don't claim to know enough about the economics of solar to know whether 3-5% tarifs will be meaningful fundamentally, but psychologically this feels like a meaningful event. If this means that module prices will rise in the US, then great, anything that can stop the death spiral in solar panel prices is welcome. If US producers see higher contract prices going forward, then that will mean analysts will have to revise their earnings estimates higher, also good. Naysayers will say that this will dampen the US solar growth, but much to the surprise of those who follow the stock prices of US solar companies, the US solar market doubled last year. I find it hard to beleive that a 3-5% tarif on modules from China will significantly dampen growth. I could go on an on about how bullish I am on solar for the long run, but finally things seem to be starting to improve on the shorter term.

Despite the weakness in US solar shares, the solar etf TAN managed a gain today on more than triple the three month average volume. I see this as a sign that the tariff news is seen by the market, on the whole, as good for the solar industry. We can speculate as to why investors are buying or covering, but the price and volume action is how the market speaks. Should the strength continue, solar will have carved out a very solid looking inverse head and shoulders bottom. If the bears want to push their solar shorts further, they'll need to quickly reverse today's action. More later...
Disclosure: I am long FSLR, SPWR and JASO.

Wednesday, March 14, 2012

Fifth Wave?

Yesterday's breakout in the major indices brings into view the all time highs on the S&P 500 and the DJIA. As stocks continue to rally through new 52 week highs towards all time highs, investors should keep in mind that this is the third major multi-month push in the bull market that began in 2008. In terms of Elliot Wave Theory this would be the fifth and presumably final wave of the cycle. There's a very good chance that we will push up to those all time highs soon, testing the highs of the 2000 and 2007 bull market peaks (at ~1500 on S&P). While everything is 100% bullish in the short term, this fifth wave is likely going to be the end of the recent secular bull market. The direction is higher for now but I feel fairly confident that sometime later this year deflation will rear is ugly head. Be prepared.

Sunday, March 11, 2012

Do or Die for the Dow

After breaking down out of a huge rising wedge pattern last Tuesday, the dow (dow tracking ETF DIA seen above) retraced back to the break point where heavy cumulative volume (see volume by price on the left) seems to confirm strong resistance near $130 (or ~13,000 on the dow). The multi-year uptrend is still clearly in tact, in my view, but stocks are positioned for a correction from here. In just glancing at this chart, a correction to 12,000 looks very reasonable and well within the scope of a longer term (~3 years) uptrend. If you zoom out further you see that stocks have been range bound for about 10 years, and we are near the top of that range. I wouldn't be surprised if something more serious developed than a 1,000 point correction but you can't make a technical argument for that here. I think even the most bullish of bulls would like to see stocks pullback to gain lower risk entries in overextended stocks. With the federal reserve meeting this week, the bears could finally get the catalyst they've been waiting for for the first real decline in stock prices this year.

However, should stocks push just a little higher from here, say above 13,060 on the dow, there could be a powerful squeeze as new shorts once again run for the exits. This would set up the dow for a test of the all time highs near 14,000. A correction to 12,000 might be just what the pulls need to muster the strength for a rally later this year towards those highs. We'll just have to wait and see how things play out but caution is warranted in the near term.

Sunday Rock Blog: Illegal Alien

Sunday, March 04, 2012