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In the first half of a bear market, it pays to shorten time horizons on longs and lengthen time horizons on stocks you’re short. In the second half, the opposite is true. Of course, nobody knows when this bear market will officially end, but if the past is a prelude, I suspect markets will treat investors more kindly in 2023 than in 2022. If so, each month gets us closer to the next bull market, making it increasingly important to hunt now for the stocks that could be the next big winners.

Stocks are a leading indicator

Historically, stocks start selling off before the economy weakens, and they begin rallying during a recession when the media is hyper-focused on terrible economic data.

The percentage of stocks in my universe of 1,600 institutional quality stocks trading greater than 5% above the 200-day moving average peaked on February 18, 2021, at 80.8% (the highest percentage since I began compiling the data in late 2013). The rate has been retreating ever since. Therefore, the average stock peaked in Feb 2021, long before the S&P 500’s peak on Jan 4, 2022, and the first-quarter decline in GDP.

This week, only 9.4% of my universe trades greater than 5% above the 200-DMA. That’s quite a difference from early 2021. Over the past decade, sub-10% readings have coincided with market lows in 2015, 2016, 2018, and 2020. 

Furthermore, the percentage of stocks trading greater than 5% below the 200-DMA reached 83% on June 23, and currently, it’s at a historically high 76%. Perhaps, just as the number trading extended above the 200-DMA peak signaled the top for the average stock last year, the number of stocks trading extended below it signals an easier path for stocks from here.

Sure, it can get worse, but as second-level thinkers like Real Money Pro’s Doug Kass are doing, we need to start weighing the odds that the path for stocks improves.

GDP is already contracting, initial jobless claims are climbing, consumer confidence is at or near a record low, and professional investors' risk-taking is at extreme lows, as measured by the Bank of America Sentiment Survey. So it’s pretty darn pessimistic out there.

Admittedly, this kind of pessimism can last a while. For example, during the Great Recession, folks were very pessimistic for about six months between Oct. ‘08 and the March ‘09 lows. Sure, you may have felt dumb for six months if you’d bought in October, but you were up nicely one year later, you felt pretty darn good a decade later, and you look brilliant today, despite this year’s shellacking.

Solar stocks: Emerging leaders?

When nobody buys because everything is terrible, it’s a good time to start adding outperforming growth stocks to portfolios. After all, if a growth stock is doing well when everything else is acting lousy, it’s a pretty good sign. For example, solar stocks have been downright impressive lately.

When the S&P 500 made new lows in June, the Invesco Solar ETF  (TAN)  was still nearly 20% above its May low. That’s a significant divergence. Some individual solar stocks have done even better. For example, Enphase  (ENPH) , a maker of solar inverters, batteries, and home EV chargers, was trading in the $180s when the S&P made its mid-June low, roughly 40% higher than its low in May.

Enphase’s momentum hasn’t waned either. While many high-growth stocks remain below long-term moving averages, Enphase has been trading north of its 200-DMA since mid-June. Today, Enphase bulls were rewarded with an 18% pop following its second-quarter earnings. That's not an easy feat in a bear market.

Recession? What recession.

Last quarter, Enphase’s revenue increased by 68% year over year, its fastest growth since the third quarter of 2021. It also delivered 109% year-over-year earnings growth, the best growth since the second quarter of 2021.

To generate numbers like that when a global recession is looming is remarkable. Clearly, a lot is going right for the company. Specifically, installers are using more of their inverters and batteries in new solar projects, and its relatively new EV charger business is starting to pay off.

Sales growth was strong in the U.S., but it was white hot in Europe, where citizens are increasingly turning to solar because of energy uncertainty caused by Europe’s reliance on Russian oil and natural gas and Russia’s ongoing War in Ukraine.

In the U.S., which accounts for 80% of sales, Enphase’s revenue rose 15% quarter over quarter and 66% year over year. In Europe, sequential and annual growth totaled 69% and 89%, respectively. European sales could continue climbing because the company is ramping its battery business there, particularly in Germany, where the energy crisis is particularly acute. In addition, a new facility set to open in Q1 ‘23 will increase microinverter capacity from 5 million to 6 million per quarter, giving it additional room for more sales growth next year.

Also, the company shipped over 8,250 EV chargers in Q2 (it acquired that business in December), and that business has already turned a profit.

A bullish technical outlook

In “I'm Not Fired Up About Big Tech Post-Earnings, but Then There's Enphase…,” Real Money Pro’s Bob Byrne called out Enphase’s strength, writing:

“Anytime we're in a bear market, it is in every trader's best interest to stalk companies trading near all-time highs, as those are the companies most likely to become new market leaders…

It's easy to see the break above multi-month resistance. The catalyst was the company's second-quarter earnings report, which easily surpassed top- and bottom-line estimates. In an ideal situation, I want to trade this stock off its first test of a rising 5-day or 8-day EMA. With the stock trading so far above the breakout point and because we're still in a bear market, I don't want to chase breakouts -- even on a chart as pretty as this one.”

CHART-Street-Smarts_072722

Byrne is an active trader who likes to buy stocks when they’re above the 21-DMA. Enphase’s gap up today means new buyers have to pay up to own it. So, his strategy is to wait and see if it pulls back a bit to even shorter-term moving averages before buying. His patience could be wise because the rally means shares are entering resistance near last year’s highs. Nevertheless, he writes, “The bottom line is as long as Enphase holds above $217, I want to look for an opportunity to get involved.” 

The Smart Play

The relative strength in solar stocks alongside secular tailwinds, including growing spending on renewable energy to diversify energy dependency, makes them very intriguing stocks to tuck into portfolios.

If you’re a short-term investor, you can follow Byrne’s lead and trade them with a tight leash.

However, if your timeline is longer, then I think you can use down days from here to build positions for the intermediate and long haul. For example, if you’re uncomfortable chasing Enphase today, you could consider buying the Solar ETF TAN instead. TAN owns over 50 solar stocks, including Enphase, which comprises over 11% of its portfolio. Currently, it’s attempting to recover its 200-DMA. TAN’s second-largest holding, SolarEdge, is another top solar stock to consider buying. SolarEdge is breaking out above its 200-DMA because of Enphase’s earnings, and it will report its second-quarter earnings on August 2.

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