The Energy Stock To Short As The U.S. Election Nears

Regular readers of my ramblings, god bless ‘em, will probably be aware of two separate things that are both relevant right now. First, I do my best to avoid politics on a daily basis, but often use anticipated trends in that area to make investing decisions, as the energy sector is increasingly political. Second, First Solar (FSLR) has been a great swing trading stock for me in the past.

Put those two things together and you come up with a trade in FSLR based on an anticipated trend in politics that I believe we will see over the next few months.

That trend is towards Donald Trump.

Please, please, don’t take that statement as evidence of a pro-Trump bias, or this sentence as evidence of a pro-Biden one. My general view of American politics is that most of the time it comes down to seeking the lesser of two evils. Even when I do have a preference, I try not to let it color my perceptions of the potential impact of politics on the market.

That is why last week, I recommended a strategy of fading any politics-based move in energy stocks as the election approaches. I pointed out then that the popular conception of Republicans being good for fossil fuel companies and Democrats good for alternative energy companies may be true in terms of their attitudes, but it hasn’t translated to moves in the relevant stocks. Big oil stocks have languished under Trump, while solar and other alternative energy stocks underperformed under Obama.

The opportunity in all that, however, comes because the market still tends to respond based on the stereotypical view of the parties. When a Democratic victory is anticipated, green energy stock go up, when a Republican is seen as a likely winner, traditional energy outperforms. That piece was about that in general, but it now suggests a specific trade.

The idea here is to sell and even short the most obvious and tradeable green energy stock, FSLR, based on an expected move towards Trump over the next few weeks. That may seem unlikely to some people, but it is based on both history and the current situation.

Remember, at this point in 2016, there were very few people expecting a Trump win, but his attacking style of personal insults and questionable assertions got him past the finish line then. It is possible that the electorate this year is less susceptible to that kind of bluster, but Trump does seem to have a good instinct for what resonates with voters and constant repetition can lend an air of veracity to even demonstrably false claims about an opponent. The Democrats seem a bit underwhelmed by their candidate and there is already a suggestion that the Biden lead in national polls is falling slightly. In addition, a post-convention Trump bump would come as no surprise, even after such a strange convention.

The point is, I am not predicting a Trump win here, but simply a closing of the gap between the two in the polls. That may prove to be temporary, and Biden’s leads in all the swing states indicates that it probably won’t be enough for a win even if it comes, but if it does, it will probably prompt the market to adjust based on the stereotypes mentioned above.

That means that FSLR, which is currently at its 52-week high and right at an important resistance level from 2018, is likely to correct back before long.

The reasons to sell FSLR if a Trump win does look even slightly more likely go beyond those for some other alternative energy stocks too…the company’s supply chain runs almost entirely through China. Some cynics see this election as a battle between China (pro-Biden) and Russia (pro-Trump) so it is safe to assume that U.S./China relations would be massively damaged if Trump does prevail, and that an extension and expansion of the trade war would ensue if that happened.

Again, I am not saying that it will, just that it will look a bit more likely over the next few weeks. Given that FSLR has so much to lose if Trump could win and that the stock is poised at a level that marked a massive downturn a couple of years ago, selling the stock short looks like a sensible trade right now.