Correlation Between Oil and Solar has Broken Down in the Past Month

The price between oil and solar stocks is normally very highly correlated and it makes sense. When the price of oil rises, alternative energy sources see an increase in demand and solar stocks tend to rise as a result. Conversely, when oil prices fall, the price of solar stocks tends to fall. That correlation has broken down over the last month as oil prices have been grinding sideways with a small move to the upside. Solar stocks have exploded in the past month. The Invesco Solar ETF (TAN) has gained 26.2% in the past month while the price of West Texas Crude is only up 5.8%.

This separation in the performances of the solar stocks and oil prices came to my attention when I was looking at the Group Trends on Tickeron’s Screener. The Solar Theme has gained 61.31% over the past month and that is the third best performance behind the Generation theme and the Novel Medical theme. The solar theme has 13 stocks in it and that is a more concentrated group than the Invesco Solar ETF, thus the big discrepancy in the gains.

The overall gain has been influenced greatly by a huge gain in VivoPower International (VVPR). The English company has jumped almost 400% in the past month. Even though VivoPower has stood out, it isn’t the only one that has experienced a big move. Sunpower (SPWR) has jumped 92.5%, Sunrun (RUN) is up 52%, and Vivint Solar (VSLR) has gained 50%.

If we look at the ratings from Tickeron, the group gets a “buy” rating overall. As for the individual ratings there is one stock rated as a “strong buy” and 10 are rated as “buys”. There is one “hold” rating and one “sell” rating. The one “strong buy” is on JinkoSolar Holding (JKS). The only “hold” rating is on Canadian Solar (CSIQ) and the only “sell” rating is on NextEra Energy Partners (NEP).

Looking at the overall fundamental picture, the group doesn’t do all that well as a whole. The average Valuation Rating is poor at 72, the average P/E Growth Rating is below average at 67, and the SMR Rating is really bad at 79.

There are a few stocks that rank okay in the fundamentals and those are JinkoSolar that was mentioned earlier and SolarEdge Technologies (SEDG). Both of those stocks have two bullish indicators and two bearish indicators. Those are the only two stocks where the bearish signals don’t exceed the bullish signals, on the fundamental side of the equation anyway.

The technical picture is almost the exact opposite. There is only one stock, Clearway Energy (CWEN), that has more bearish signals than bullish ones—three bearish and two bullish. The biggest positive skew is on Sky Solar Holdings (SKYS) which has five bullish signals and only one bearish signal.

Two indicators in particular show bullish signals for a great number of the solar stocks. The AROON Indicator shows bullish signals on 12 of the 13 stocks while the Momentum Indicator shows bullish signals for nine of the 13. The MACD indicator isn’t bad either with eight of the 13 stocks getting a recent bullish signal.

With the price of West Texas Crude hovering between $38 and $44 per barrel over the last few months, the huge jump in solar stocks is incredibly impressive. It is also out of the ordinary to see such a decoupling. One thing that I kept thinking about, what will happen if oil breaks higher? If oil prices were to jump back up to the $50 to $65 per barrel range, the range for all of 2019, we could see another big jump in the price of solar stocks.

Alternative energy sources like solar have become more popular in recent years as the push for renewable energy sources has grown. That provides a certain amount of demand that I don’t think is going to go away, even if oil prices were to drop again. However, if oil prices were to break higher, the solar industry will likely see another big move to the upside.

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