The Invesco Solar ETF rose about 26% in May, its best month since September 2013. The fund's most bruised holdings led the charge, and the timing tells you a lot about what kind of rally this was.
Today the group is pulling back. The fund is down around 5% in early trading, and the names that ran hardest are giving back the most. After a move like May's, that is normal. The bigger question is whether the rally was a real turn or a violent bounce off the bottom.
The Move
The Invesco Solar ETF climbed about 26% in May, edging out its prior best month from September 2013. The leaders were the inverter makers that had been left for dead. Enphase Energy rallied more than 110% on the month. SolarEdge gained nearly 79%.
Those are not the moves of a healthy uptrend. They are the moves of stocks that fell so far that any good news triggers a stampede. Enphase entered the month trading in the $30s, near its longer-term average price. It now trades around $64, after peaking near its 52-week high above $73 during the rally and bottoming near $26 last year. That is a stock that more than doubled off the floor in weeks.
First Solar tells a steadier story. The panel maker trades near $300 with a market value around $32 billion, close to its 52-week high. It is the one large-cap in the group that has stayed consistently profitable, and it carries the largest weight in the solar ETF.
What Drove It
Solar stocks live and die on the cost of money. These are capital-heavy projects financed with debt, so lower rates make new installations pencil out and higher rates kill them. For most of the past two years, the direction of rates worked against the sector.
The May surge ran the other way despite a hot inflation backdrop, which points to two forces. First, the most shorted names rocketed on what looks like heavy short covering rather than fresh fundamental demand. Second, durability in clean-energy tax credits removed a worst-case policy fear that had been priced into the group.
That combination took a deeply oversold sector and snapped it back fast. It did not, on its own, fix the rate math.
The Catch
The reason the group is red today sits in the bond market. Oil prices are jumping, gas prices are following, and that is pushing inflation expectations and mortgage and lending rates higher this month. Rising rates are exactly the headwind solar does not want, and the sector is reacting in real time.
There is also the structure of the rally to respect. When a 26% monthly move is built on triple-digit gains in former short targets, the same volatility that powered the run cuts both ways on the way down. A fund like the solar ETF concentrates that risk, with its three largest holdings making up more than a quarter of the portfolio, and it carries a management fee on top.
The Real Test Is Rates
The next real test is rates, not headlines. The May jobs report Friday, the inflation reading June 10, and the Federal Reserve decision the following week will set the direction of borrowing costs into the summer.
A cooler set of numbers eases rates and gives the recovery names room to extend. A hot set, especially if oil keeps climbing, pressures the most rate-sensitive corner of the market first. After the best month in over a decade, solar has a lot of fresh gains to defend, and the macro calendar will decide whether it can.
