West Texas intermediate futures fell nearly 4% Tuesday to $48.06 per barrel, oil’s lowest closing price since April 2009 and weakness in the oil patch is rapidly spreading to other corners of financial markets.
Plenty of investors know that marquee energy exchange traded funds from the United States Oil Fund (NYSEArca: USO) to the Energy Select Sector SPDR (NYSEArca: XLE) have been hammered by oil’s plunge, but the pain does not end there.
“The big bets on high energy prices made by companies like Ford Motor Co. (down 13 percent since oil peaked on June 20) or Tesla Motors Inc. (down 10 percent) or Boeing Co. (down 3.9 percent) jump immediately to mind,” reports Michael P. Regan for Bloomberg.
The oil-inflicted pain does not end with those companies. Just ask solar ETFs. While USO has plunged nearly 46% over the past 90 days, making it one of the worst-performing non-leveraged ETFs over that period, the Guggenheim Solar ETF (NYSEArca: TAN) and the Market Vectors Solar Energy ETF (NYSEArca: KWT) are off 14% and 11.3%, respectively.
“The prime suspect for the recent decline has been the falling costs of hydrocarbons, whose continuing abundance and relative cheapness threaten to put a damper on solar appetite in the coming years. With oil prices down by a quarter in the last six months and with little sign of any impending rebound, commitments to solar projects will no doubt be tested even in the wake of the recent falling costs experienced by the industry,” according to Markit.
Traders have been positioning for further declines in TAN and the ETF’s holdings, a familiar scenario as solar stocks are often heavily shorted. That has allowed TAN to outpace its underlying index and, at times, deliver a decent dividend yield while tracking a sector not known for its dividends. [Short Covering Could Lift Solar ETFs]
Those short bets against the stocks held by KWT and TAN, the larger of the two solar ETFs, have already been rewarded. However, with oil showing few signs of life, TAN’s ability to find support just above $32 will come into focus…and be tested.
As the chart below, courtesy of J.C. Parets of All-Star Charts, indicates, if TAN is unable to find support in the low $32 area, downside for the ETF is to the $28.20 area, or more than 12% below where TAN closed Tuesday.
Guggenheim Solar ETF
Chart Courtesy: J.C. Parets, All-Star Charts