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The Stock Market in General and Solar Stocks in Particular

March 18, 2009
Renewable and Solar Energy Perspectives with J. Peter Lynch
http://www.renewableenergystocks.com/PL/
Exclusively for InvestorIdeas.com and Renewableenergystocks.com

As I have said many times over the years solar stocks have a bright future, a very bright future. But investors have to understand a number of things about the current stock market and solar stocks in particular in order to fully take advantage of this long-term trend.

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Markets go up and markets go down and these moves usually occur when it is least expected. At the present time solar stocks, the energy industry and the market in general have been in a very serious decline. The Dow Jones is breaking records everyday and the press is full of bearish articles about the market and about the questionable future of the solar industry.

If we take the time, look a little deeper and put aside the general media. I think we will see a very different picture and one that would suggest the very BEGINNING of “light at the end of the tunnel” and of the potential for investor’s to be a little more optimist at this time.

The General Market

The Dow Jones Industrial Index recently recorded a twelve year low and the media was FULL of doom and gloom. This terrible news was all over the financial press, accompanied by scenarios of more of the same to come. In fact, the recent survey from the American Association of Individual Investors (AAII) had fallen to the most bearish level in history – 70% of those surveyed felt that the direction of the market would be DOWN over the next 6 months.

There are four interesting items below to take note of from an historical perspective. Remember the bottom of a market is ALWAYS, by definition, the period of greatest fear. I have been a student of the market since 1975 and I can assure you that there is plenty of FEAR out there now.

  1. The last two times the stock market hit a 12 years low was in 1974 and 1932. BOTH of these times proved to be once in a life time buying opportunities.
  2. The previous record of FEAR by the AAII survey (67% bearish) was October of 1990 the very beginning of the great bull market of the 1990’s.
  3. Remember corporate earnings and unemployment ALWAYS lag behind the stock market. So well after the market has turned around we will continue to see poor earnings and higher unemployment.
  4. The current market is EXTREMELY technically “oversold” (i.e. beneath its 200 day moving average). In fact, it is more technically oversold than any time since 1930, JUST BEFORE the market moved up 48% in the 1930 bear market rally

Nothing is 100% for sure, as we all know. But I think we are either at a significant bottom or very close to it. Everything is so “oversold” at this time, that I think the worst case is that we get a significant rally in what could still be a bear market.

Two other items I think are worthy of note. Last week there were a number of indications that two very significant negatives could be turned to the positive very shortly.

  1. The mark to market accounting rule will be modified to reflect “reality”. This will positively impact balance sheets significantly and should positively impact financial institutions especially.
  2. The up-tick rule will be re-instated. This will stop short sellers from pushing stocks lower and fanning the flames of panic and fear. Ever since the rule was withdrawn (October 2007) it is OBVIOUS the effect it has had on the market.

Keep in mind that ALL the bad news out there is in media now. We already know all the bad news. Remember that the stock market IS actually a discounting mechanism which looks out 6 to 9 months into the future. We do not need GOOD NEWS to turn the market around, only LESS bad news.

The Solar Stock Market Sector

Solar stocks have also been doing terribly since the second quarter of 2007. Just like the general market, we need to look a little deeper, past the media hype, and see what is actually happening with solar stocks in the market. One of the measures (tools) that I utilize when looking at individual stocks is their 50 day moving average and whether the current price is above (bullish) the 50 day average or below (bearish) the average. It is not the only way to look at stocks and may not be the “best”, but it always seems to give me an idea of which way a stock is heading in the short to medium term and when looking at a specific market sector, what sort of condition that sector is in.

At the current time, 3 of the 35 solar stocks I follow are ABOVE (Bullish) their 50 day moving average. On the other hand 92% of the stocks (32 of 35) are BELOW (Bearish) their 50 day moving average. This clearly tells me to exercise caution in the solar sector and that the sector still needs some time to sort out the recent general market decline and a number of industry specific problems.

To put it a different way, I do not think ALL the bad news regarding the solar sector is out yet and that there will be future negative surprises, such as earnings disappointments (ENER earlier this week for example), inventory write-offs, and possibly even bankruptcies. The solar sector will probably get carried UP when the general market rallies, but since they will have to work out some additional problems; I do not think their rally will be sustainable.

However, if the current project financing “roadblock” suddenly opens up a much more sustainable rally would be possible, especially in the wind sector (i.e. the ETF “FAN” may be a conservative way to play this potential), and the stronger stocks would take the lead.

Numerous opportunities will come, but investor patience will be required to wait out this tough period and for sector volatility to “settle” down. This is still an embryonic industry and it is going through a painful retracement and consolidation phase.

Wall Street Wisdom – A few general lessons I have learned over the years

Assuming the above analysis is reasonably correct, what wisdom and benefits can be gained from this current situation?

1. Markets and stocks ALWAYS get ahead of themselves (in the short term) and subsequently go to extremes in both the up and down directions. I think we are at an unsustainable extreme (down) at this time and that we will get at least a significant rally shortly.

2. When an investor is researching potential investments they must understand that a company needs to be looked at in two ways:

  • a. As a company with a business and;
  • b. As a stock, separate from the business of the company

What I mean is that you can have a good company and a bad stock and you cannot “fall in love” with the company, you have to look at both. A perfect example of this is one of the greatest and most respected companies in the world – General Electric. I think it is still a “great” company, but the stock has gone from $42.00 in early 2008 to a low of approximately $6.00 last week – certainly NOT a great stock.

Has General Electric become an unsuccessful company that is going out of business and has no future? I seriously doubt it, but it is an almost perfect example of a good company (with temporary problems) and a stock that is reflecting those problems.

3. The solar industry has a very bright future, for decades to come. However, you have to keep in mind that we are only at the VERY BEGINNING of the industry’s growth. As a result, in addition to enormous opportunities that lie ahead, we will also most likely see above average volatility and more technical failures than successes. This is the way ALL new industries start up, grow and finally emerge. Investors have to be aware of this level of risk (and opportunity) and act appropriately according to their own financial tolerance for risk.

4. Any correction in solar stocks or the market in general can also be turned around and provide an advantage for the patient investor. When a sector or market corrects it generally takes ALL stocks (good and bad) down with it. However, once the correction has run its course the stronger stocks (i.e. those stocks with the highest “relative strength” compared to the general market and to their peer group) will ALWAYS come back to life faster. This is an excellent way for an investor to pick out the stronger companies in the sector and get involved before they have fully recovered.

Rewards come to those investors who are patient and do not follow the crowd

Aspiring investors need to acquire and nurture patience. Historical data clearly shows that more money is made MISSING the downside than catching the upside. As I read my e-mails from readers, I get the feeling that people really want to buy solar stocks and ride them into a bright future. Many times I get the sense that they are afraid, that if they delay, they will miss the chance to profit from the solar industries bright future. This is NOT true. There will be plenty of time and many advances and declines in the future. Be patient, look for the strongest stocks and try not to get swept up in the crowd, because the crowd is always wrong.

Mr. Lynch has worked, for 31 years as an independent analyst and investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for the past 17 years to the Photovoltaic Insider Report, the leading publication in Photovoltaics industry that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He can be reached via e-mail at: solarjpl@aol.com or at his new website: www.sunseries.net.

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