CEOs of Trina Solar ( TSL) and Suntech Power ( STP) have recently been talking up the opportunity for China to be a huge demand market in 2012. Stocks rallied at the beginning of 2012 because Germany had a huge upswing of demand in the fourth quarter, helping to bail out the solar sector from oversupply, and a more optimistic demand outlook for China has been among the catalysts for solar stocks. Yet short-term trading sentiment continues to treat solar stocks like ping pong balls. Even stocks like Energy Conversion Devices ( ENER), clearly headed toward bankruptcy, were up more than 100% this year among the trading frenzy. Energy Conversion declared bankruptcy on Tuesday. Then solar stocks sold off as the first rumors started hitting the Wall Street reports that Germany might cut its solar subsidies harder and faster than in previous years because of the demand rush. Then solar stocks rebounded from the German selloff as more reports surfaced of a rosy demand scenario. Consequently, solar stocks rallied again last week, bringing year-to-date gains in many stocks to 80% or more, which was one more compelling reason to sell solar stocks. Getting the picture? There are only two trades in solar: excessive pessimism or excessive optimism. There's a parable I like to tell when solar stocks reach a tipping point of either euphoria or existential crisis: The pessimist says, "It can't get any worse." The optimist replies, "Yes it can." The beginning of this week would have been a good time to take some profits in solar, when more reports surfaced saying that Germany might in fact make steeper and quicker cuts to solar subsidies than previously imagined (and it's all imagination, since no one on Wall Street really knows what's going in in the German parliament). In fact, TheStreet suggested that it was time to take profits last week, and it was. Solar stocks sold off steeply. In fact, the outsized role Germany continues to play in controlling the fate of solar earnings is the real story: As much as the companies in the sector talk about how much China, India and the U.S. are growing as markets to offset the legacy markets of European subsidies, it simply isn't a trade in solar that can outweigh Europe. Which brings us to the last key trading issue for solar stocks.
5. German feed-in tariff headlines will continue to weigh heavily on the sector, and be more of a catalyst for these stocks than individual earnings reports
It's always been this way for solar stocks when it comes to Germany and in particular after periods of demand frenzies in solar's largest market. The German politicians in support of solar fight to limit the subsidy cuts while solar's enemies try for the umpteenth time to get a hard cap on solar installations enacted as law, and through it all, loose "anonymous" lips among German politicians send solar stocks into a period of sustained headline volatility. When it comes down to it for earnings season action, put away your arguments about how great solar's future is, that grid parity will be arriving next Tuesday, and that solar panels will soon outsell the iPhone. The solar trade typically comes down to two data points: how much will shipments grow, and are gross margins trending up or down. Solar executives, particularly the heads of the Chinese module makers, are expected to talk up shipment growth in 2012, but better shipment guidance without better profitability isn't going to keep solar stocks moving up, especially with more negative news out of Germany potentially on the horizon. -- Written by Eric Rosenbaum from New York.