It’s Earth
Day, so now seems like a good time to take a look at what is happening in solar
energy stocks. To be honest, my interest in the area is prompted as much by the
fact that crude has been lacking a discernible direction for a while as it is
the date, but still…
The State of Oil
WTI futures
have been moving around and offering up some good intraday opportunities, and I
happen to think that the last couple of days of trading lower could be the
beginning of a move that tests the bottom of the range since February, at
around $57, but the buying that keeps emerging below $61 gives me pause. Energy
Income Trader subscribers know the relatively low risk way I am playing
that belief, and if you got in on the move down early that way you are still in
good shape, but I wouldn’t be in a rush to short right now.
So, I am
left waiting and looking, and that means looking elsewhere…
The Long-Term Case for Alternatives
Most people
are aware of the long-term case for alternative energy, but it bears repeating.
The world is slowly, but inexorably, moving away from fossil fuels. That has
been the case for a long time, but the change has accelerated recently as costs
for solar and wind power have fallen and with the technological changes that
have made electric vehicles (EVs) more practical and affordable.
The thing
is, though, we aren’t as far down that road in a global sense as some people
think. Global demand for oil and natural gas combined is still increasing and
is forecast to keep doing so for some time. The 2020 IEA Energy Outlook, released in October of last year,
for example, points out that the two most used models to forecast oil demand
both see it continuing to rise into the 2030s.
However,
markets are forward discounting mechanisms, meaning that they tend to reflect
what will be much more than what was. That is why, for some time now, companies
in industries like solar and wind power have seen their stocks hold up, even if
the companies were struggling to make a profit.
That trend
accelerated in the second half of 2020 as the recovery from the initial Covid
shock progressed and then jumped even further after the environmentally minded
Joe Biden was elected to replace the fossil fuel-friendly Donald Trump in
November. That can be seen in the 1-year chart for the Invesco Solar ETF (TAN)
below…
Why TAN?
What you can
also see there, though, is that that move was overdone, and a retracement began
in February. There are reasons to believe that retracement is now over, and we
will see another surge in alternative energy stocks over the next couple of
months.
Biden took
the opportunity of Earth Day this morning to issue a release saying that the
administration is aiming for net zero U.S. emissions by 2030. That is probably
political wishful thinking rather than an achievable goal, but just talking
about it will increase the interest in the sector for a while.
So, the obvious question is how to play that.
Industries such as wind power and fuel cells will have their moments as that
play out, but as the IEA said in the aforementioned report, solar has become
the …new king of electricity”, so it makes sense to concentrate there. You can make a case for a few of the usual
suspects there, with FSLR being my top single stock pick, but for a generalized
move into solar, I prefer an ETF, which brings in FAN.
The Technical Setup
Let’s look
again at that chart for FAN, but with some annotation…
The two outside lines mark the extent of the move up, with the middle line representing a 50% retracement of that move.
As you can see, FAN has come close to that level three times now and bounced each time. That makes a move up from here more likely. Three tries at a level are often followed by quite a big move away from that level. You can see an example of that in the other direction in January and February, when FAN formed a triple top before the retracement began. That triple bottom has another advantage too: it allows for a logical stop just below that level, at say $75.90.
Conclusions
So, with oil in the doldrums a bit, the focus that Earth Day will bring on green energy stocks, a White House that is both committed to environmental issues and not afraid to throw money at a problem, and a good chart setup, buying FAN looks like a decent trade at these levels.
Cheers,
M
