Monday, July 28, 2008

Do Renewable Energy Stocks Correlate With Oil Prices?

They do however correlate with the overall equity market, which is why we paraphrase Chairman Mao from time to time:
...The reason, to paraphrase Chairman Mao's statement "The guerilla must move amongst the people as a fish swims in the sea" is that climate/energy investments swim in the larger sea of the markets....
The guys at AltEnergyStocks scare me, I sometimes think they are reading my mind. In May I noted:
AltEnergyStocks comes slamming home with the post I was going to do, but better, backwards and in heels:...
Last week AES did it again. This time Charles Morand beat me to a graphic depiction of recent trends with "Alternative Energy & Conventional Energy: Is An Image Worth A Thousand Words?":

It wasn't long ago that people still believed the price of energy commodities - and crude oil in particular - had a greater impact on alt energy stocks than did general movements in equity markets or even fundamental factors.

The logic went something like this: even though oil and most of the sub-sectors that make up the broad alt energy space (e.g. solar) are not in direct competition with one-another, expensive oil is the number one driver behind governments searching for alternatives to the way we currently meet our energy needs. For a time, this theory may have held true as far as short-term movements in the prices of alt energy stocks went - but is it still the case?

About a quarter of the way through the book Technical Analysis for Dummies, there were no doubts left in my mind that technical analysis wasn't my cup of tea. Nevertheless, I do like data and enjoy looking at charts as far as general trends are concerned. I therefore thought I'd take a look at a few basic charts to see if, at least visually, there appeared to be any relationship between movements in energy markets and movements in alt energy equities....

His conclusion?:

...Of course, nothing conclusive can be drawn from this small exercise, and since I am a bottom-up stock picker I only partially care about what makes the market move in the near-term. My primary interest in doing this was to see if, should we enter into a period of energy price correction, I should keep my eyes open for promising companies that may trade at a discount due to non-fundamental factors (i.e. supply and demand in the market).

From this brief analysis it seems as though I might be better off with continued troubles in equity markets as a whole for finding alt energy bargains.

Go here for the charts and Tom Konrad's comment.