By Michael Cintolo, Vice President of investments and Editor of Cabot Market Letter and Cabot Top Ten Report
For Cabot Market Letter 9/10/08

You must always remember that Wall Street is a two-way street, and that not only goes for the market as a whole, but also for individual stocks…even those with tremendous growth. Many investors like to believe that most leading stocks will rise forever, or, failing that, will meander for a couple of years before getting going again. But that’s not what actually happens.

Remember this historical fact: The biggest winners of market history, once they’ve topped, have fallen more than 70% from their peaks before reaching their lows. 70%! Yes, even though sales and earnings continue higher for a few quarters after the top.

Why such drops? As usual, it comes down to institutional investors—their consistent buying drives a leading stock up for 12 to 24 months (on average), but at some point, selling pressures (from those who bought early and want out) balance the buying pressures. Eventually, the tide shifts, and when most big investors want out, they can drive prices lower in a hurry, and without much of a rally. Essentially, the huge upmoves create pent-up selling pressures that, when the time is right, result in much lower prices.

That leads us to First Solar (FSLR), which, after a long partnership, we decided to sell last week. Why? Because of the stock’s action: After flopping around for months between 240 and 300, it broke down decisively on big volume, dropping below its 200-day moving average for the first time in its history, and below key support at 240.  

And, of course, this break came after a rise from around 30 at the start of 2007 to as high as 317 this May—a 10-fold rise in 17 months.

What about earnings? What about sales? What about the limitless potential of solar energy? Fundamentally, there’s no denying First Solar has been a great growth company. But the market is always looking ahead, and big investors have found reasons to sell. It’s possible alternative energy tax credits will expire, which could hurt. Maybe solar cell prices will fall faster than expected, which will slow earnings growth markedly and cut FSLR’s P/E ratio, which currently stands at a lofty 88.

You shouldn’t spend all day trying to find the reason why First Solar’s stock has broken down; usually the real reason is revealed a few weeks after the stock breaks. Besides, we’re talking about the stock, and not the company. If investing were as simple as buying good companies, we’d all be rich.

The big thing to remember is that sellers in FSLR have the upper hand today, and when this happens following a mega-advance, a stock often falls sharply for weeks and months. Could the stock come back? Of course—anything is possible in the stock market. But given its action and the market environment, the odds favor further downside in the weeks and months ahead.  SELL.

Interpret, Don't Predict

We just wanted to take a moment to address some emails we’ve received of late. Most of them tell us that we’re crazy for speculating that a market bottom could possibly be coming, given how dire the headlines are. And some of them are in the opposite camp, asking us what to buy now in anticipation of the big bull market to come.

Our major response: Don’t be too quick to predict what the market will or won’t do. We do believe, based on historical studies, that a successful re-test of the mid-July lows is possible, which would be followed by a sustainable advance. The horrific news these days and the drop in the number of new lows (a maximum of 391 in recent days, versus 1,304 in July) are two of the many traits we see today that are typically seen during such bottoming processes. Yet we’re not predicting that’s going to happen—our Model Portfolio is sitting on a ridiculously high cash hoard, and it will remain heavily in cash until our indicators change their tune.

Said another way, it’s not your opinion that counts, nor ours, nor that of the pundit you just watched on TV. The market’s opinion is the only one that truly counts. So stay flexible, and you’ll be ready to get in early on the next bull market, whenever it begins.

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