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Sector Spotlight: Guggenheim Solar ETF (TAN)

A closer look at TAN's technical and sentiment backdrop

by 8/14/2014 10:32:33 AM
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The Guggenheim Solar ETF (NYSEARCA:TAN) has been a strong performer on the charts. Following yesterday's 2.5% rally to close at $41.74, the shares are up 18.6% year-to-date and have found a potential foothold atop their 80-day moving average. In fact, eight of the 16 solar stocks we follow also are hovering above their 80-day trendlines, pointing to substantial strength within the solar sector. If that's not enough, the ETF has outperformed the broader S&P 500 Index (SPX) by 8.7 percentage points during the past three months.

Daily Chart of Guggenheim Solar ETF (TAN) since August 2013 With 80-Day Moving Average

Despite all of this encouraging technical data, TAN is facing extreme negativity in the options pits. During the past 10-days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the ETF has racked up a put/call volume ratio of 23.31 -- with more than 23 puts bought to open for every call. This reading is higher than any other taken in the last year, meaning traders have never scooped up bearish bets over bullish with such rapidity -- though it's possible some of the long puts may have been initiated by shareholders attempting to hedge their long solar stock positions against an unexpected pullback in the sector.

Short-term speculators have also been attracted to TAN puts. The equity's Schaeffer's put/call open interest ratio (SOIR) rests at 1.53 -- higher than all other readings from the past 12 months. In other words, traders targeting options set to expire in the next three months have shown an extreme bias toward puts (relative to calls) recently. Should TAN continue to power higher on the charts, a capitulation among these option bears could produce tailwinds for the shares.

Elsewhere, short sellers have been targeting the Guggenheim Solar ETF (NYSEARCA:TAN) in recent months. In fact, the ETF's short interest-to-float ratio currently sits at 8.0, meaning it would take eight sessions for the shorts to buy back their bearish bets, given TAN's average daily trading volume. To put that number in perspective, it hasn't been topped since February 2013, and has been trending higher since bottoming at 0.90 last November. Long story short, if the ETF can sustain its positive momentum, a short-covering rally could ensue.

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