If you have been reading what I write here for the last few years, you will know one thing about me if nothing else…I love a contrarian trade. Given that, it should come as no surprise that I look at stocks like CSIQ and FSLR in the solar power sector and see them as a sell even though that goes completely against conventional wisdom.
That contrarian bent comes from my background in interbank forex, where less publicized and less dramatic versions of the now famous GameStop (GME) squeeze were an everyday occurrence. We were always on the lookout for a situation where positions were lopsided, knowing that if everyone else were already short, aggressive buying would have an exaggerated effect. There would be fewer offers in the market as the players had already sold and if you could start to generate some upward momentum, those that were "short and caught" would be forced to cut their positions, adding a whole new army of buyers.
After a crazy couple of weeks in stocks like GME, BB, and AMC, most people are now all too aware of that trading technique and know exactly what a short squeeze is. What many don't really get, though, is that the same thing can happen when everyone is long, only in the opposite direction, and that is what I see now when I look at solar stocks.
The 1-Year charts for CSIQ (top) and FSLR (bottom) look remarkably similar. Both have seen great gains as the expectation of a Biden win in last year's Presidential election…
If you have been reading what I write here for the last few years, you will know one thing about me if nothing else…I love a contrarian trade. Given that, it should come as no surprise that I look at stocks like CSIQ and FSLR in the solar power sector and see them as a sell even though that goes completely against conventional wisdom.
That contrarian bent comes from my background in interbank forex, where less publicized and less dramatic versions of the now famous GameStop (GME) squeeze were an everyday occurrence. We were always on the lookout for a situation where positions were lopsided, knowing that if everyone else were already short, aggressive buying would have an exaggerated effect. There would be fewer offers in the market as the players had already sold and if you could start to generate some upward momentum, those that were "short and caught" would be forced to cut their positions, adding a whole new army of buyers.
After a crazy couple of weeks in stocks like GME, BB, and AMC, most people are now all too aware of that trading technique and know exactly what a short squeeze is. What many don't really get, though, is that the same thing can happen when everyone is long, only in the opposite direction, and that is what I see now when I look at solar stocks.
The 1-Year charts for CSIQ (top) and FSLR (bottom) look remarkably similar. Both have seen great gains as the expectation of a Biden win in last year's Presidential election became a reality and everyone positioned for a shift to a focus on renewable energy and to better trade relations with China, an important player in solar. There has been some volatility on the way up, and this looks at first glance like just another consolidation. But there is one significant difference about this dip. What that is becomes clearer if we look at 3-month charts for the same stocks…
This time around, the decline in both CSIQ and FSLR has come as trading volume in the stocks (the bars at the bottom of the charts) has declined quite significantly and consistently. That tells me that the buying frenzy is almost over. Those that wanted to buy already have, and there is no one to buy on this dip. If there aren't many people left to join the ranks of the buyers, they are now vulnerable.
Before we go any further, let me make one thing clear. Back when I worked in the forex market, executing a squeeze was not that hard. I worked on a big, powerful desk that turned over billions of dollars a day. We had the muscle to do it and could easily recruit others to the cause. Right now, as an individual, that isn't the case. Now, I don't get to decide when a squeeze starts but I do know what a setup looks like, and this looks like a good one. If I can see that, so can others and it is collective action that moves markets.
I know that, logically, the buyers have it all their way. Biden has already issued a slew of executive orders aimed at transforming America to a green nation and will probably make a lot of speeches and declarations about the same subject in the coming months and years. You can even argue that shifting to clean, renewable energy sources is not just a political agenda, it is essential to the survival of America and the world. You could even be right in that, but does anyone think real, measurable change will happen within the next few months?
Energy infrastructure, both domestic and global, takes time to change. Demand for solar power will grow, but will it grow by the four or five hundred percent that the gains in CSIQ and FSLR suggest over the next couple of months? Obviously not.
Long-term fundamental shifts in society will always win out in the end, but sometimes market moves that anticipate such changes can get ahead of themselves and, when they do, the short-term direction of a market becomes far more dependent on market dynamics and positioning. Both CSIQ and FSLR are retracing after massive gains, but are doing so on reduced volume, suggesting that they are at that point where the market imbalance is about to take over. They are running out of buyers, which gives potential sellers a lot of power. That could still be undone by news or data that support the long-term case for the stocks, but that is unlikely to come too soon, so for now, as counterintuitive as it may seem, I'm a seller of CSIQ, FSLR and most other solar stocks.
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