TAN Invesco Solar ETF

The Solar ETF space has had a pretty rocky—and for the most part—unfavorable history. However, 2013 was a banner year for the space with a number of solar power stocks accelerating and seeing huge gains.

In fact, thanks to solid earnings and a bright outlook, the solar ETF segment easily outperformed the market in the YTD time frame. Both the Guggenheim Solar ETF (TAN) and the Market Vectors Solar ETF (KWT) have surged more than 80% YTD, thoroughly crushing the broad market’s performance over the same time period.

Still, most of these gains came earlier in the year and especially over the summer when solar ETFs were roaring higher. As of late, the solar ETF market has been a bit choppier as investors have sought to lock in some gains in this impressive market segment (see 3 Sector ETFs Crushing the Market in 2013).

This profit taking—coupled with some concerns over high flying stocks thanks to the Fed and their easing program—has sent solar shares sharply lower in the past few weeks. Concerns are really starting to build over this space, particularly if you take a technical look at the most popular ETF in the segment, TAN.

A Technical Look at TAN



While TAN had strong momentum earlier in the year, events have become far choppier as of late. The product is now well off of its 52 week high, and recent trading has been pretty negative.

In fact, TAN recently saw its 9 Day SMA (Simple Moving Average) fall below its 50 Day SMA, suggesting short term bearishness. The product is also seeing a sluggish reading in its Parabolic SAR, further confirming the short term bearishness for the solar space (see Go Green with These 3 Clean Energy ETFs).

Fundamental Factors

Beyond these worrying technicals, there have also been some concerns creeping up in the fundamental side of the equation as well. This is particularly true on the earnings front, as results have come in a bit more mixed as of late. Two companies that have been great examples of this recent trend are SolarCity (SCTY) and ReneSola (SOL).

SCTY saw solid earnings and revenues for the most recent quarter, but its guidance definitely disappointed investors. It is now looking for a loss between 55 and 65 cents a share, compared to a loss of 47 cents a share before. This was ill-received by the market—which was having increasingly high expectations for SCTY—so a drop in share price was pretty much inevitable following this news (see Did SolarCity Earnings Crush the Solar ETF Rally?).

Meanwhile, RenaSola is a great example of the concerns building over the Chinese segment of the solar market. The company recently announced it would be closing a polysilicon factory, sending shares of this company, and other Chinese solar firms, plunging.

Furthermore, there are also concerns that utility-scale projects will be capped in China for 2014. So while there is likely to be a 12 GW installation target, this could assist smaller solar firms more than their larger counterparts, hurting components of products like TAN or KWT in the process.

So with this kind of backdrop, solar ETFs have been hit relatively hard as of late, sending prices of both sharply lower. In fact, TAN is down almost 15% in the past month, while KWT is sporting a loss that is approaching 10% over the same time period as well, suggesting these securities are definitely in a serious slump.

Bottom Line

While the short term isn’t looking great for TAN and KWT, there is hope for the longer term for both of these products. Solar still makes up a very small part of the total energy mix in the U.S. so there is plenty of market share that can be gained by this energy type.

Plus, the segment has weeded out many of its weakest players already, so the few that remain are among the strongest and most efficient players, meaning they are well positioned even if there is a prolonged downturn in the market (see all the Alternative Energy ETFs here).

So, if you have been thinking about solar ETFs lately, consider waiting for a bottoming out of this short term trend, but be ready to buy for the long term once this recent bear run subsides.

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MKT VEC SOLAR (KWT): ETF Research Reports
 
SOLARCITY CORP (SCTY): Free Stock Analysis Report
 
RENESOLA LT-ADR (SOL): Free Stock Analysis Report
 
GUGG-SOLAR (TAN): ETF Research Reports
 
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