For the most part, good timing results in the majority of your investment returns, whether you’re investing in the broader stock market or in a specific market sector. The problem, of course, is that nobody can predict the future and trying to time the stock market is extremely difficult. (See The Best Stock Market Advice I Know: Get Ahead of the Business Cycle.)
One market sector that experienced a major wave of wealth creation, followed by an equally spectacular wave of wealth destruction, was the solar energy market sector. For a while there, anything to do with solar panels or the alternative energy market sector was super hot for speculators. Then we had the big stock market meltdown in late 2008 and 2009, which corrected this speculative market sector, and it was never able to recover like the rest of the stock market.
Recently, most of the solar-energy-related stocks have been dropping off a cliff, as the industry has been hit by the perfect storm—a weaker global economy, cuts to government subsidies and heavy competition, which has lowered operating margins.
First Solar, Inc. (NASDAQ/FSLR) is a domestic manufacturer of solar cells and power systems. This company just announced another major cut to its revenues and earnings estimates for 2011, citing a weaker economy and strong competition from China. The stock grew to approximately $300.00 a share in 2008, then corrected to about $150.00 during the subprime mortgage crisis. The stock bounced around the last couple of years and was trading at $150.00 per share at the beginning of this year. Now it’s trading below $40.00 a share. This it is a spectacular example of a short selling opportunity. In fact, the entire solar energy market sector was a great short sale, with other major players like JA Solar Holdings Co., Ltd. (NASDAQ/JASO), Trina Solar Limited (NYSE/TSL), and Yingli Green Energy Holding Company Limited (NYSE/YGE) all having dropped significantly on the stock market this year.
I’ve never been a fan of short selling, but lots of people are. It is a useful tool to help stock market traders benefit from excessive valuations. The easiest way to look at short selling is as identifying a market sector that’s experienced tremendous upside, then waiting for it to correct. Just like in the solar energy industry. The great thing about short selling the solar energy market sector was the confirmation achieved by most of the other stocks within that universe. They all began to correct at the same time and this makes a short selling trade much easier to initiate.
We’re in a stock market now with no major trends, either up or down. For traders, the opportunities are event-driven without a tailwind, but they are out there nonetheless. Like I say, the best way to identify potential new short selling trades in this environment is to identify market sectors with stocks that are moving in a group. With the latest revenue reduction of Intel Corporation (NASDAQ/INTC), an attractive short might be in large-cap technology. Of course, the hardest part about stock market speculating is deciding when to make the trade. Nobody said this business was going to be easy.