In a note to my friends and family on January 21, 2008, I said:
...I am cutting my position in alternative energy to 8% or less of my holdings. This is no time to be a hero. Capital preservation is essential.Since then, there has been a spectacular decline in alternative energy stocks. For a broad measure of the alternative energy market, I like to look at the Powershares Global Clean Energy ETF (PBD). As shown below, the alternative energy equities market as a whole is down around two-thirds over the last six months:
The rest of my portfolio is Gold/Silver, US Govt Bonds, International Treasury Bonds, Yen, and shorting the market (where you make money as the stock market goes down). FDIC insured CDs and savings bonds are also safe for the time being. I strongly recommend selling most or all of your stock holdings. There might be some spectacular rallies along the way, but I am not going to try to time the market. The overall market trend is decidedly down. We won't hit the bottom of this for years. It is not too late to short the market. Just remember that there will be bumps along the way. I will wait for alternative energy stocks to stabilize before I even think about re-entering the market. Even then, it will be with a small position.
(click image to enlarge)
A few things that are starting to become clear. First, the dotted line that marks the bottom trend line of the recent sell-off is parallel to to the solid line that marks the upper trend line for the alternative energy bear market as a whole. This is a good thing. I believe this lower trend line is likely to hold. We are now towards the bottom of that trend range and are testing the upper dotted line that marks the top of the recent sell-off. At some point in the next month, I would like to see this ETF break through the upper dotted line, which would be a short term bullish signal that would allow the ETF to try to retest the solid upper trend line. In any case, this ETF is filled with a lot of unprofitable losers along with a few profitable winners, so a bottom will happen for winners such as FSLR and FAN long before this index shows signs of a true recovery. The P/E ratio of this ETF is still around 38 which is still high, even for growth companies.
The drop has been dramatic to say the least, far surpassing the 45% drop on the DowWilshire5000 composite index. A major factor in the scale of the decline is the fact that P/E ratios for alternative energy stocks were grossly inflated six months ago. P/E ratios of 60 or 100 were commonplace (note to investing newcomers, the lower the P/E the better). Now there are many good companies out there with P/E ratios under 10. STP, WFR, and FAN (ETF for the wind industry) come to mind.
Let's take a closer look at the First Trust ISE Global Wind Energy Index Fund (FAN). This ETF sports a much more reasonable P/E of 9.69. Just by valuation alone, I would say that FAN is much closer to a bottom than PBD, but let's take a look at the chart for a technical analysis perspective:
One of the first things that I notice when I look at this chart is that, unlike PBD, FAN is actually starting to show some support/resistance levels in the current price range. $9-10 looks like a near term bottom and if this ETF can break back above $14 it could really start to come alive. If it clears $14 that could be the sign of a very bullish "double-bottom" or "W" chart pattern. As you can see, this ETF moved back above the upper dotted trend line. If it holds above this dotted trend line, that would a further indication of near-term bullish-ness.
So how long will the overall weakness in the alternative energy sector last, and what should we be looking for to determine a final bottom for renewable energy stocks? That is a bit tough to say right now. The PBD chart above looks pretty darn ugly and while FAN is showing some strength it certainly isn't out of the woods yet. I currently have about 20% of my portfolio in alternative energy stocks, but that is primarily to balance out the 20% of my portfolio that is shorting the market right now. As I noted in Vicious Bear Market Rally Likely, I am trying to stay market neutral right now and there are very few companies out there that meet my criteria of sustainability and future profitability outside of the alternative energy world.
The real question facing renewable energy is that of fundamentals. Will there be enough demand to meet all the increased supply coming from these growing companies as the broader market continues to contract? I hope to address this issue in an entry very soon.
A few things that are starting to become clear. First, the dotted line that marks the bottom trend line of the recent sell-off is parallel to to the solid line that marks the upper trend line for the alternative energy bear market as a whole. This is a good thing. I believe this lower trend line is likely to hold. We are now towards the bottom of that trend range and are testing the upper dotted line that marks the top of the recent sell-off. At some point in the next month, I would like to see this ETF break through the upper dotted line, which would be a short term bullish signal that would allow the ETF to try to retest the solid upper trend line. In any case, this ETF is filled with a lot of unprofitable losers along with a few profitable winners, so a bottom will happen for winners such as FSLR and FAN long before this index shows signs of a true recovery. The P/E ratio of this ETF is still around 38 which is still high, even for growth companies.
The drop has been dramatic to say the least, far surpassing the 45% drop on the DowWilshire5000 composite index. A major factor in the scale of the decline is the fact that P/E ratios for alternative energy stocks were grossly inflated six months ago. P/E ratios of 60 or 100 were commonplace (note to investing newcomers, the lower the P/E the better). Now there are many good companies out there with P/E ratios under 10. STP, WFR, and FAN (ETF for the wind industry) come to mind.
Let's take a closer look at the First Trust ISE Global Wind Energy Index Fund (FAN). This ETF sports a much more reasonable P/E of 9.69. Just by valuation alone, I would say that FAN is much closer to a bottom than PBD, but let's take a look at the chart for a technical analysis perspective:
(click on the chart to enlarge)
One of the first things that I notice when I look at this chart is that, unlike PBD, FAN is actually starting to show some support/resistance levels in the current price range. $9-10 looks like a near term bottom and if this ETF can break back above $14 it could really start to come alive. If it clears $14 that could be the sign of a very bullish "double-bottom" or "W" chart pattern. As you can see, this ETF moved back above the upper dotted trend line. If it holds above this dotted trend line, that would a further indication of near-term bullish-ness.
So how long will the overall weakness in the alternative energy sector last, and what should we be looking for to determine a final bottom for renewable energy stocks? That is a bit tough to say right now. The PBD chart above looks pretty darn ugly and while FAN is showing some strength it certainly isn't out of the woods yet. I currently have about 20% of my portfolio in alternative energy stocks, but that is primarily to balance out the 20% of my portfolio that is shorting the market right now. As I noted in Vicious Bear Market Rally Likely, I am trying to stay market neutral right now and there are very few companies out there that meet my criteria of sustainability and future profitability outside of the alternative energy world.
The real question facing renewable energy is that of fundamentals. Will there be enough demand to meet all the increased supply coming from these growing companies as the broader market continues to contract? I hope to address this issue in an entry very soon.
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