Should Solar Stocks Trade on Rising Oil?

Source: The Street, Eric Rosenbaum  (2/2/11)

"The facts don't support the rhetoric, but the rhetoric may support trading action."


You've heard the rhetoric before: a rising price of oil will shift more attention to alternative sources of energy, and that's a trigger for bullish trading in solar stocks, and clean energy stocks more generally.

In fact, investors are hearing the rhetoric again now. Between President Obama's State of the Union call for 80% of energy from renewable sources by 2035, to the political unrest in Egypt and the spike in crude, the solar/oil trading rhetoric is back in the headlines. Talking heads on CNBC will point to a rising price of oil as a reason for investors to give solar stocks a look, but should this really be in the minds of investors among all the reasons to trade in solar stocks?

Pavel Molchanov, analyst at Raymond James, who covers both traditional and alternative energy stocks, said that, historically, oil has traded in an inverse relationship to the equities market. In the past few years, that has not been the case, as rising oil prices have coincided with rising equities prices.

The Raymond James analyst says that since the financial crisis, oil has been closely correlated to the broader market, and it's not because the equities market causes oil to be up or vice versa, but the fact that both are trading on the same macro drivers: employment, consumer confidence, the Fed policy and China, for example. Solar stocks have a link to the broader markets and are high beta plays, too.

"Rising oil prices reflect improving oil demand but the average solar stock shouldn't care; it should care about supply and demand in solar," Molchanov said.

Solar stocks were all up broadly on Wednesday amid a bullish 2011 outlook from MEMC Electronic Materials.