By J. Peter Lynch, Financial Anaylst
A new series that offers a quick snapshot of the most recent solar stock performance. This week, the current market signals: Investor Caution.
Talk about the Million Dollar Question. Wouldn’t we all like to know the answer to ‘Where is the Market Headed in 2011?’ Unfortunately, as we all know – no one knows the answer to this question.
But we can look at history and find some fairly interesting data (from the Stock Traders Almanac). While it’s not perfect, it certainly has a far above-average accuracy.
The Dow Industrial Average [DJIA] managed its best month of January since 1997 with a return of 2.7%, while the S&P 500 [SPX] fared nearly as well with gains of 2.3%.
There is an old stock market saying, first coined by legendary market historian Yale Hirsch, “As January goes, so goes the year,”
The average return, based upon data since 1970, for the rest of the year after an up January is 12.2% for the S&P 500. Following down January returns the S&P 500 has averaged 11-mo returns of -2.1% until the end of the year.
Does this mean that the market will be up over 12% for 2011? There is no way to know.
But it is certainly interesting to look back at history and see that a positive January certainly bodes well for a positive stock market for 2011 as a whole.
On the other hand, currently the market is very overbought and will likely have at least a 10% correction along the way.
Take a look below for an overall summary and table that offers a current snapshot of the “technical picture” of my selected solar stocks. I plan to update this series weekly and/or whenever there are any significant changes.
Note: At this time there is a general market comment advising caution to perspective buyers.
A number of the stocks I follow have seen their monthly momentum turn negative in the last week or two. The sector finally seemed to be showing signs of life again after a terrible 2010, but in the past few weeks a number of our stocks dropped below their 50 day MA – a short term negative for the stock.
At this time the strongest stocks are: JKS, LDK, SOL, SOLR, TSL and First Solar (FSLR). Two of what I call my “solar seven” (JASO and SOLF) have had their rating reduced from Strong “S” to Neutral “N.”
Critical levels for the weakest “solar seven”
JASO – starting to show some strength. If stock closes below $7.00 it is a further sign of weakness, if the stock closes above $8.25 it is a sign that the stock has regained its upside strength.
SOLF – SOLF is at a critical long term support level. A close below $8.00 it would trigger a sell signal.
Other Stock Comments
SPWRA – starting to show some real strength for the first time in quite a while. Looks like the next candidate to move up to a “S” strong rating.
Market Comment – Caution Advised
Currently the market has two potentially serious “red flags” warning investors to be cautious:
- Investor Sentiment
Investor sentiment is considered to be a contrary indicator and when too many investors or investment newsletters are Bullish – it is a time to be cautious.
At the current time BOTH the American Association of Individual Investors (AAII) poll of its members and the Investors Intelligence poll of investment newsletters are above their danger zones of 50%.
There is no guarantee of anything in the stock market, as we all know. But levels of sentiment so extremely bullish would historically indicate at least the potential for a market correction of 10% to 15%.
- Stocks are very overextended
On the technical side the market is very overbought above its 200 day moving average. In fact, the current overbought condition is more extreme than any important market top in the last 10 years – certainly another significant reason to be very cautious at this juncture in the market.
Solar Stock Review as of the close on Friday 12 February 2011
|Symbol||Recent Price||50 day MA||Trend||Weekly momentum||# of weeks||RS||Sig Rating|
50 Day Moving Average (MA) – this is a short term measure of a stock’s current technical picture. If the current price is above the 50 day MA it is a positive indication and if it is below the 50 Day MA it is a negative indication.
Overall Trend – this is the overall longer term trend of the stock (Positive+ or Negative -). When solar stocks were badly underperforming the market almost all our solar stocks were in negative trends – the stocks that turn to a positive trend first are usually the strongest stocks relative to the group as a whole.
Weekly Momentum (Mom.) and Number of weeks positive or negative – this is a measure of the short term momentum of a stock. It is derived by comparing the one week moving average (MA) of the stock to the five week moving average. When the one week MA goes ABOVE the 5 week MA the weekly momentum turns positive, when it goes BELOW the 5 week MA the weekly momentum turns negative. Momentum, on average, stays positive or negative for between 6 and 8 weeks. So a stock that has been negative for 1 or 2 weeks will usually have at least a few more weeks of negative action to come. This would be useful, for example, if someone wanted to buy a particular stock and its momentum just shifted to negative, they will likely be able to buy the stock lower if they are patient and wait for a pullback in the price of the stock.
Relative Strength – this is a measure of the strength of an individual stock relative to a widely followed index – in this case the Standard and Poor’s 500 (S&P 500). If the relative strength is “buy” this means that the individual stock is stronger relative to the index and vice versa.
Rating – this a my technical rating on each of the solar stocks after reviewing the technical indicators (momentum and trend) plus a number of additional indicators (monthly momentum, strength relative to the S&P 500 stock index, overbought/oversold status etc.) to arrive at a comparative rating as to how each stock stands technically. N = neutral, W = weak and S = strong.
Keep in mind that there are two basic types of equity (stock) analysis. Below is a brief description of each and its primary purpose:
Fundamental Analysis – this is the analysis of the fundamental financial condition of the company and will identify which stocks are stocks you may want to buy when the timing is right. This form of analysis will give you NO indication of the best time to buy the stock.
Technical Analysis – this form of analysis will tell you “when” to buy a stock. It will do this by showing you (in chart format) the basic interaction of supply and demand and when the two change and shift which will indicate a time to buy or a time to sell.
Mr. Lynch has worked, for 34 years as a Wall Street security analyst, an independent security analyst and private 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 17 years to the Photovoltaic Insider Report, an early publication in PV that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He is currently a private investor and has from time to time been a financial/technology consultant to a number of companies. He can be reached via e-mail at:SOLARJPL@aol.com. Please visit his website for the promotion of solar energy – www.sunseries.net.
This article was originally published by InvestorIdeas.com and was reprinted with permission.
Thanks for the indicators, they’ll help me in all kinds of stocks. Just wondering, what are your thoughts on why solar has had such a run-up?