Green energy stocks extremely overbought

January 11, 20213 Comments

I believe that the green energy sectors are moving into bubble territory. Hear me out on this:

The Invesco Solar ETF (TAN-US) holds the top names in the solar power industry. Top holdings: Enphase has a forward PE ratio of 162. Solar Edge is at 88, and Sunrun at 765 forward earnings (source: Thomson Reuters). Incredible.

Technically, the ETF trades 115% ahead of its 200 day / 40 week moving average. My rule of thumb is to start watching a security as it gets ahead of that moving average by much more than 10%…I consider 15% ahead of the 200 day as quite overbought. TAN is beyond overbought.

From Beartraps research: TAN is the most over its 200 day SMA that its ever been

Tesla bubble

Tesla is the Electric Vehicle poster-boy. At a current (trailing) Price to earnings ratio of 1767 and a forward PE of 378 – can anyone argue that it is fairly priced? Technically, the stock is so overbought, it makes past bubble stocks look like good value. If I recall correctly, Canopy Growth hit a PE of 99 in 2018 before it imploded.

Technically, the stock is 143% over its 200 day SMA. Traditional momentum indicators are in their overbought zones, as you will note on the chart below. There is little doubt that this stock is driven by speculation, and that speculation revolves around the excitement surrounding green energy and the Biden election.

Keep in mind that many bubbles are driven from realistic trends.

  • The bubble in Japan’s stock market during the 1980’s was driven by genuine expansion trends in their economy.
  • The technology bubble of the 1990’s and implosion in 2001 was driven by a very real move away from old school industry towards technology and the internet.
  • The housing and oil bubble implosion of 2008 was driven by genuine growing trends in housing expansion and energy usage that began in the late 1990’s.

There is little doubt about the shift towards clean energy in Europe and North America (see my blog re the lack of such a shift in China and India). The change is real, just as the shift towards technology and the housing expansion shifts noted above were real. But are the prices realistic, and are expectations for growth realistic?

No-one can pinpoint when an overbought move will end. All we can do is look at the current situation and recognize it for what it is. You don’t necessarily sell into a bubble right away, but you sure need to keep an eye on it for any deterioration of trend. Remember: The market takes the stairs up, but it takes the elevator down.

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3 Comments

  • “My rule of thumb is to start watching a security as it gets ahead of that moving average by much more than 10%…”

    Tan appears to have been at least 10% above it’s 200 day since late july of last year. It has more than doubled in price since then. If you had of followed that rule you would have missed out on all that gain. Of course you could have trimmed your position buy you would have still given up a lot of upside following that rule

    Reply
    • Its not the only rule I use to sell Dave. It is a factor. Just like using RSI. It might go overbought, not necessarily a sell signal for longer termed investor. Having said that, I’d say that if the stock moves too much ahead of that level – say 20% over the SMA, it is very worth consideration of selling upon a hook down in a momentum indicator. The 200 day is the heads-up. There will be other indicators to sue to trigger the actual signal. No one signal is a system. You need confirmations.

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