Never Boring

Another week has passed and I hardly know what to make of it.

I'm still positive on my two add-on buys of (SOL), barely on the most recent. The stock came back nicely this week and ran up over $23 intraday Thursday, then fell from there to close at $22.15. Energy stocks were hit hard Thursday afternoon when China announced it was reducing it's gasoline and diesel subsidies, effectively raising prices at the pump. The market's immediate reaction was that higher prices will reduce demand, so crude sold off.

I still don't understand why solar stocks trade in parallel with crude prices, but they do. I've found no evidence that solar energy, which produces electricity, is any kind of viable alternative to gasoline - which is the primary use of crude oil. Crude oil is used to produce electricity, but in such small amounts it is insignificant. IF there are someday a large number of electric vehicles available, then solar energy could replace gasoline by producing the electricity that charges these cars; it would also reduce coal consumption (coal accounts for 50% of our electricity).

For the time being, I just have to accept that solar stocks tend to trade with crude prices, whether there is a good reason for it or not.

After giving back some gains on Thursday (SOL) opened lower on Friday and stayed down all day, along with the overall market. Encouraging signs were that the stock traded on below average volume and closed above the 10 week moving average - both indications that the stock is now finding the institutional support that was lacking when it dropped ahead of the secondary offering. In the past week all the evidence I've seen has indicated to me that (SOL) is right back on track with the strong support it had before.

However, the problem now may be the overall market. This week was just ugly. The Dow is very close to undercutting it's January lows, from there you'd have to go back to September '06 to find the last time the Dow traded below 11,600. The S&P 500 doesn't look much better, and the Nasdaq has finally lost it's 50 dma. If the massive drop wasn't enough bad news, it came on huge volume as Friday was options expiration day.

Things certainly look bad. From what I know about bear markets, we should have a third and probably even a fourth leg down. The market is set up for the third leg down to happen soon, if it isn't happening already.

On the other hand - maybe we're near the end of the third leg down?

Take a look at this chart of the Dow:

I've used red arrows to mark the January lows, the March lows (which led to the recent rally) and the current lows. I notice that the March lows stopped short of the January lows - could this be a level where the market sees 'value?'

Yes, there's a lot of bad news out there, but is any of it new? The sentiment is extremely negative, but that could be a contrarian indicator that the market is ready to turn.

The difficulty of the last rally was that it was led by crude prices - a catch 22. Only the energy stocks had momentum. If crude prices stabilize or fall, could that open up buying into the rest of the market?

Honestly, I don't see the stage set for any major rally, and certainly not for a bull market anytime soon. On the other hand, I don't see signs of the apocalypse, either. I think there's reason to believe this market can survive the summer and set up for a fall rally, especially it being an election year.

What does all this mean for my holdings? I'll continue to keep a tight leash on my recent buys, there is no reason to risk capital in this market. I have about 1% at risk on my last two buys. I'll let me original purchase ride unless I see the stock break down and roll over.

I can't help but think about the Saturday several weeks ago, when I was on a tremendous run and thinking of cashing out. I'd hate to think that it's proper to invest on instinct, but I would be looking good right now if I'd followed my gut and gone to cash then.

-Geoff

Post Script on (SOHU) - the stock lowered revenue guidance for 2009 and rolled over on Friday, crashing through the 50 dma on huge volume. As it turns out, my stop loss from last week worked out better than if I'd continued to hold. I was right for the wrong reasons. I'll take it.