A Year Later: Market Up, Clean Energy Down

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Tom Konrad, CFA

When I called the peak a year ago, it was too soon for the broad market, but not for clean energy stocks.  I think both have room to fall, but clean energy may bottom first. 

Almost a year ago at the start of June, I wrote saying “we’re near the peak” of the stock market.  I was too early, and admitted it in August.  But I also said that it was a bad time to be in the market: the risks of a decline far outweighed the potential gains of remaining in an overvalued market.

Since the start of May, investors are once again realizing that not all is right with the economy, and the market can go down as well as up.  I’m willing to go out on a limb again and say I think the market has a lot farther to fall from here, and I expect the S&P 500 to be below where it was when I made my call (at 945.)

What Was I Thinking?

When I made my call, it was based on the feeling that all the stocks I watch (almost exclusively clean energy) had come too far, too fast, and were overvalued.  My mistake, it seems, was extrapolating from what was going on in my sector to what was going on in the market as a whole.

Consider this chart comparing the performance of a domestic clean energy ETF (PBW), a global clean energy ETF (ICLN), and the NASDAQ and S&P500 broad market indexes (click for full sized chart):

Perfomance Chart

While the broad market indexes continued to rise until late April this year, the S&P Global Clean Energy Index (ICLN, in red) peaked at $26.00 shortly after my call.  The Powershares Wilderhill Clean Energy Index (PBW, in blue) had a minor peak at $11.37  at the same time, but went on to scratch out another 5% gain by early January 2010 before turning decisively down.

ICLN is now down 31% from its peak, while PBW is down 22% from its minor peak following my market call. 

What Went Before

You’ll also note that in the three months leading up to my call, clean energy had been strongly outperforming the broad market indexes.  I became nervous as I saw stock valuations rise too far, too fast in my own sector, and I made the mistake of generalizing that personal experience to the market as a whole.

Over the last year, I have become increasingly bearish about the broad stock market.  In August of 2009, I wrote that I had shifted my portfolio into a market-neutral stance.  I’ve had an overall short position since September 2009, and have encouraged readers to get out of the market or take short positions since then.  Most recently I wrote at the end of April that it was time to “double down” on puts to hedge against market exposure or gamble on a market decline.

The Future

I still believe that the market is overvalued.   However, because of the declines in clean energy stocks, I am starting to see individual companies that are decent values.  On May 16, I profiled one such example, CVTech Group (CVT.TO, CVTPF.PK.)  I think it’s still too early to begin buying even these reasonably valued stocks.  If we have the broad market decline that is looking increasingly likely, reasonably stocks are likely to get caught in the downdraft, and fall further until they are incredible bargains.

Those bargains, I feel, are now just a matter of months away.  (Time will show the accuracy or inaccuracy of that prediction, too.)

DISCLOSURE: No positions.
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