A Closer Look at ... JA Solar, JinkoSolar, and GT Solar
It's been tough going for the solar sector in 2010. In fact, the Claymore/MAC Global Solar Index Fund ( TAN ) has shed roughly 28% on a year-to-date basis, compared to the S&P 500 Index's (SPX) gain of more than 12% for the same time frame. What's more, TAN's recent rejection at its 160-day moving average has forced the exchange-traded fund ( ETF ) back below long-term resistance at the $7.50 level.
Despite its poor performance, investors remain bullishly aligned on the sector. For instance, nearly half of the 311 ratings on alternative energy stocks are "buys" or better. As TAN's price action weakens, these bulls could be forced into abandoning their losing positions, thus resulting in additional downward pressure on the sector.
JA Solar Holdings Co. Ltd.
Within the solar sector, JA Solar Holdings Co. Ltd. ( JASO ) is a prime example of the group's poor performance. Since peaking near $10.20 on Oct. 24, JASO has plummeted more than 32%, with the stock dipping below former support at its 10-week and 20-week moving averages. What's more, JASO is now trading back beneath long-term resistance at the $7 level. This region capped the equity between October 2008 and September 2010, and could once again pose a significant technical hurdle.
On the sentiment front, Wall Street remains firmly entrenched in the bulls' camp, despite JASO's weakening price action. According to Zacks , 11 of the 19 analysts following the security rate it a "buy" or better. What's more, Thomson Reuters reports that the average 12-month price target for JASO rests at $11.69 - a premium of nearly 70% to the stock's current trading range. Any downgrades or price-target cuts could provide fuel for another round of selling pressure for JASO.
The situation is much the same outside of the analyst community. For instance, JASO's Schaeffer's put/call open interest ratio (SOIR) of 0.54 indicates that calls nearly double puts among options with less than three months until expiration. While this ratio ranks near the midpoint of its annual range, speculators on the International Securities Exchange (ISE) and Chicago Board Options Exchange ( CBOE ) appear to be working on sending JASO's SOIR lower. During the prior two weeks, more than nine calls were bought to open for every one put purchased on these exchanges. As JASO continues lower, an unwinding of the hedges related to these calls could create a headwind for the shares.
Finally, short interest soared roughly 27.6% during the prior month, resulting in about 18.9 million JASO shares sold short. As a result, nearly 15% of the stock's float is now sold short. With call buying rising in tandem with short selling, it is likely that some JASO bears are hedging their positions. With hedges to protect their positions, it could embolden short sellers, thus creating additional selling pressure for JASO. Traders looking to take advantage of an extended sell-off for the stock should consider a February 8 put.
JinkoSolar Holding Co. Ltd
JinkoSolar Holding Co. Ltd. ( JKS ) held its initial public offering (IPO) on May 14, with the stock closing at $11.01 on the session. Following a brief dip, the shares proceeded to rocket nearly three-fold to a peak of $41.75 on Nov. 4. However, the shine may have finally worn off this freshman solar stock, as JKS has plunged more than 92% from its November peak, roughly halving its post-IPO surge.
Currently, JKS is struggling to maintain support at the $21 level, an area that has held as short-term support since the beginning of December. However, the $23 region, an area that has provided support and resistance since August, has capped JKS during the same time frame.
What's more, the equity's 10-day and 20-day moving averages have descended into the $23 region, and are creating considerable downward pressure on the shares. JKS has not closed a session above this duo since Nov. 9. A breach of short-term support near $21 could mark the beginning of another downleg for JKS.
On the options front, JKS speculators have loaded up on bullish bets. For instance, the stock's SOIR of 0.45 indicates that calls more than double puts among options with less than three months until expiration. Meanwhile, the stock's ISE/CBOE 10-day call/put volume ratio arrives at an impressive 43.44. In other words, 43 calls have been bought to open for every one put purchased in the prior two weeks.
Some of this flood of call buying is likely being used to hedge short positions. During the past month, the number of JKS shares sold short spiked a whopping 91% to 2.1 million. While more than 18% of the stock's float is sold short, a breach of support at the $21 level could embolden these bearish traders, thus exacerbating JKS' decline. Traders looking to bank a profit on the equity's eroding price action should consider a February 25 put.
GT Solar International Inc. (SOLR)
The sun is not setting on every member of the solar sector, however, as evidenced by GT Solar International Inc.'s (SOLR) year-to-date rally of more than 53%. Technically, the stock has enjoyed the support of its 10-week and 20-week moving averages since June. And, while the shares breached this duo in early November, SOLR's 50-week moving average quickly moved in to provide a springboard of support.
Options traders have picked up on SOLR's strong price action, as the stock's SOIR of 0.44 indicates that calls more than double puts among near-term options. This ratio also ranks below 89% of all those taken in the past year, indicating potentially high expectations from options traders.
What's more, SOLR's 10-day ISE/CBOE call/put volume ratio has ballooned to a reading of 33.16. In other words, more than 33 calls have been purchased for every one put bought to open in the prior two weeks. This reading also ranks above 80% of all those taken in the past year, meaning that speculative traders have rarely snatched up calls at a faster paced in the prior 52 weeks.
Options traders aren't alone in their bullish outlook. For instance, eight of the 10 analysts following the shares rate them a "buy" or better, with a distinct lack of "sells." Furthermore, Thomson Reuters reports that SOLR's average 12-month price target rests at $11.52 - a premium of roughly 30% to the stock's current trading range.
Short sellers, meanwhile, have eschewed the bullish outlook for SOLR. During the most recent reporting period, these bearish traders increased their bets by more than 14%, resulting in about 10% of the stock's float being sold short. This rise in short interest could also explain some of the call buying on the ISE and CBOE, as short sellers look to hedge their bets.
It's important to remember that, from a contrarian perspective, bullish investor sentiment is only a detriment to declining stocks. As such, the optimism from options traders and Wall Street analysts is to be expected for SOLR, especially since the stock is up more than 50% in 2010. The key to the stock's outlook is $9-$10 region. If SOLR can finally push past this technical sticking point, it could force short sellers to capitulate to the security's uptrend. However, a rejection here could send the bulls scrambling for the exits.
Given this outlook, bullish SOLR options traders may want to consider entering a call spread by buying the February 7.50 call and selling the February 10 call in order to lower breakeven and limit losses if the equity is unable to break out to the upside.