Strong Oil Prices Light a Fire Under Solar Stocks

Crude oil prices just don't want to stop moving higher. Today's inventory drawdown of 7.1 million barrels, as reported by the EIA, suggests that demand remains strong and prices are finding strong support at this level.

Strong oil prices have an obviously bullish overtone for the energy and energy services sectors, but strong crude prices are also driving the alternative-energy sector. This sector is becoming an increasingly important group as oil prices move high enough to make these solutions economically viable.

Powershares Clean-Energy Index

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Groups, such as the solar-energy sector, have seen a renaissance as new technologies emerge to increase power output, and rising oil prices along with government subsidies make solar power a real economic option for the first time.

One company in the solar space that we like is Sunpower (SPWR). Sunpower designs and manufactures high-performance solar systems for residential and commercial customers. The company was spun off from Cypress Semiconductor (CY) and is a majority-owned subsidiary of Cypress.

Currently, the stock is holding a solid uptrend line and has been rallying since September 2006. The recent corrective action in the market pulled it back off of the highs, but the stock never even tested the primary uptrend line. In addition, last month's pullback looks corrective, and there hasn't been any distributive action in the stock. The bottom line is that the stock is back on the offensive having broken its short-term downtrend channel as rising oil prices encourages the bulls to move into the name.

Sunpower vs. Energy Index

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If we look at the comparative relative strength of this stock vs. the S&P 500 and the Energy Index (XOI), we can see that Sunpower is acting much stronger than either of them. Traders should look for trades on the long side that are outperforming the market and their sector on a relative basis.

With SPWR and the rest of the solar stocks benefiting from a bullish fundamental backdrop, momentum traders are getting more involved in this space as well. These market participants serve to accelerate the advance and keep a bid under the stock price. That potential upside comes with some added volatility. Please bear that in mind.

With worldwide demand for crude oil remaining strong and supplies continuing to dwindle, the outlook for the price of oil remains firm and with it should be the demand for solar power exposure. Traders can enter SPWR at these levels and use a break of the primary uptrend line at $58 as a stop-loss.

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