Solar ETF Looks For Short Covering Support

The Guggenheim Solar ETF TAN stumbled last year, but the largest solar exchange-traded fund is showing signs of shaking out of those doldrums. Year-to-date, TAN is higher by more than 7 percent, and with a move of just over 5 percent, the ETF will reclaim its 200-day moving average.

TAN, its holdings and other solar stocks are often favorite targets of short sellers. That gives traders the a contrarian opportunity with TAN during solar earnings season in the event positive earnings surprises arrive, forcing bearish traders to cover positions in TAN constituents.

Bears, Shorts And Covering Positions

Among the most heavily shorted companies reporting earnings this week are Sunpower Corporation SPWR and Solaredge Technologies Inc SEDG. In fact, Markit data indicate that short interest those stock is at record highs. Solaredge Technologies and Sunpower combine for over 8 percent of TAN's weight.

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“Solar firms haven’t experienced nearly the same amount of covering as their conventional peers. Two solar firms, Sunpower and Solaredge, both make this week’s list of heavily shorted names. Both have been profitable short targets over the last 12 months as their shares have fallen by 70 percent and 46 percent over this period respectively,” said Markit.

Short Sellers And Shares Outstanding

According to Markit data, both Solaredge and Sunpower have 16.7 percent of their shares outstanding on loan to short sellers. Short interest in Sunpower is higher by 5 percent over the past month. Both companies report earnings Wednesday.

"Recent bullish factors for solar stocks include (1) strong overall world demand for solar with the sector set to grow by at least 20 percent this year (see page 4 for the world solar growth outlook), (2) the strong prospects for U.S. solar in coming years after Congress in December 2015 approved a 5-year extension of the U.S. solar investment tax credit (ITC), (3) strong demand for solar power worldwide due to the increasingly competitive price of solar versus alternatives and as countries seek to meet their carbon reduction targets under December's Paris COP21 global climate agreement,” added MAC Solar, TAN's index provider.

TAN holds 28 stocks with an average market value of $9.8 billion, underscoring the point that this is primarily a mid-cap ETF. On that note, TAN is volatile as highlighted by its three-year standard deviation of 32.8 percent.