First Solar (FSLR) reported earnings after the close yesterday, and the shares are selling off on the news.

First Solar Inc., the nation’s largest solar panel maker, said on Wednesday that its third-quarter profit jumped almost 55 percent on higher revenue. But revenue fell well short of analyst expectations because of a contract that wasn’t signed until the current quarter, sending shares tumbling in late trading.

The company said it earned $153.3 million, or $1.79 per share, for the quarter that ended Sept. 26. That was up from $99.3 million, or $1.20 per share, during the quarter that ended Sept. 27, 2008.

Revenue rose 38 percent to $480.9 million from $348.7 million a year earlier.

Profit topped the $1.74 per share that analysts surveyed by Thomson Reuters were expecting, but revenue was shy of the $528.8 million average estimate.

Looking at the chart two minutes after the market open, we can see price has fallen 17% on the news, and is now trading below the 50 and 200 day moving averages. Even before the earnings news, the chart was clearly in a bearish orientation, with lower highs and lower lows.

To be clear, solar, and clean energy in general, is very likely a good investment in the very long term. For now, however, the trajectory of most solar stocks is toward the downside. In most cases we can see a series of lower highs and lower lows, with price trading below key moving averages.

Moreover, the broader market is showing some serious cracks this week. Certainly the market could bounce from here and continue in its rising trend. At the same time, investors should take note that this week’s dollar rally could signal an intermediate-term bottom for the greenback. For now, the eyes of traders are fixed firmly on the dollar. With the global carry trading hinging on the dollar, traders borrow dollars at a low interest rate to seek higher return in riskier asset classes such as equities and commodities. A rising dollar negates some of the advantage of the carry trade, and also signals that traders are becoming more risk averse.

Relative to the dollar and the equity markets, the US government cannot follow a quantitative easing, ultra-low interest rate policy forever. Bill Gross at PIMCO thinks equities are near a top:

“Investors must admit that without the policy guarantees of the Fed, Treasury, and FDIC, as well as the continuation of punitive 0% short-term rates that force investors to buy something, anything, with their cash, that risk spreads may widen again, not stabilize,” Gross wrote. Read Gross.

He said the six-month rally in risk assets “is likely at its pinnacle.”

Given the action of the past few days, we are probably due for an oversold bounce. I will be using any bounce to scale out of existing long position, and to increase my short exposure. It is probably premature to call an end to the rally, but caution levels should be raised given the past week’s action.

Coming back to the solar sector, we also can see that solar stocks generally have underperformed the market throughout the seven-month rally. FSLR has been trending lower since May. Sunpower (SPWRA) also sold off after earnings last week and has not participated in the current rally at all.

- Suntech Power Holdings (STP) has traded sideways since April. Price has been trending steadily lower since August, and is sitting on the edge of a cliff in terms of technical support. A break below 12.15 would be highly bearish, and would signal an excellent short entry.

- Solarfun (SOLF) has been trending lower since June, has already broken key support, and is a short on strength.

The only solar stock I find remotely interesting as a long trade is Energy Conversion Devices (ENER). This is still a risky, bottomfish type of play. Still, it is showing some signs that it has bottomed, with plenty of volume on the buy side during the past two months, showing that somebody is accumulating the stock at these levels. If the broader market regains its footing during the next week, ENER could provide some opportunities. A break below 10.00 would negate any of the bullish technical factors, and signal a short entry.

As we get into the heart of earnings season, investors will be watching the quarterly results in order to predict the market’s reaction, both short- and long-term. Earnings reports help us gauge the health of individual companies, as well as the broader macroeconomic trends across industry sectors. At the same time, it is important to note that stock price action will often move seemingly at odds with earnings results. This because, at least in the short term, markets do not trade on valuation alone. Moreover, valuation itself is a tricky game.

Henry Blodget explained some of the difficulties inherent to valuation in a 2004 article:

A share of stock is, in theory, worth the “present value of future cash flows” attributable to the share. (In practice, a share is worth what someone will pay for it, but leave that aside for a moment.) Given the confidence with which some commentators cite the theory, a casual observer might assume that the “present value of future cash flows” is an indisputable number, akin to a price tag on a can of soup. In reality, however, it is not a number but an argument, and, in most cases, it is a surprisingly imprecise argument, with a wide range of reasonable conclusions.

Blodget goes on to discuss the complexity of evaluating future cash flow given the uncertainties of the broader economic environment, future earnings, and, particularly, interest rates. As he says,”Over the long haul, thankfully, valuation does matter: The market is not random, stock prices do tend to regress to long-term means, and long-term investors are better off buying when stocks are cheap. As discussed in a previous piece, however, the “long term” is long (decades, not years), and valuation is not a particularly helpful prediction tool over timeframes of three months to a couple of years (not worthless—just not particularly helpful).”

In this light, we can consider the prior two quarters of earnings results, post meltdown, that led to continuation of our remarkable rally. At no time since the financial crisis began have company earnings been particularly good. In fact, across the board, both revenue and earnings have been down drastically. Remaining profits often have been the result of cost-cutting, or in the case of the larger banks, profits from trading with taxpayer dollars. Moreover, when it comes to banks and REITs, financial results have not been marked-to-market. Therefore there are certainly enormous unreported liabilities throughout the system. As in many billions of dollars worth. The media has generally reported the sustained rally as being due to improving economic conditions. Perhaps to a degree this is the case. At the same time, it is equally likely that we have rallied due to the massive liquidity injected through bailouts, quantitative easing, and other government activities. Disaster was averted. Yet it is unclear that anything has truly been fixed. On the contrary, we have seen a massive wealth transfer from US taxpayers to Wall Street, in a desperate attempt to solve an overleveraging problem by simply taking on more debt. Our “jobless recovery” rests on very shaky foundations indeed. Most likely it simply sits atop a newly-formed asset bubble.

This week Doug Kass wrote up an excellent analysis of the current season’s earnings, drawing the following conclusions:

1. The third-quarter beats were overhyped as they are the outgrowth from lowered guidance.

2. If one divides the third-quarter earnings reports by end-market categories, differentiating between the beneficiaries of restocking and those companies that are closer to the end markets and consumption, it leads to two different pictures as to the health of corporate earnings.

3. If end demand doesn’t pick up (and pick up quickly), the 2010 earnings outlook for many industries (such as semiconductors and other beneficiaries of restocking) will be in jeopardy, as will be the now ambitious consensus for S&P 500 earnings of over $70 a share next year.

So what is an investor, or trader, to do in such an environment? For now, the market continues to go up. I remain very cautiously net long in my portfolio, with an emphasis on stocks in the following sectors: energy (especially clean energy), Brazil, China, and select technology stocks. In my view the pickings are getting slimmer, and other signs indicate we may be nearing the a market top. Investors should note in particular the inverse directional relationship between stock market and the dollar. Talk is increasing in Forex circles that the dollar is due for a trend change. Moreover, other countries may soon follow Brazil’s lead in making policy changes to prevent overvaluation of their currency with respect to the dollar. The world does not want an overly weak dollar. With countries vying to devalue their currencies, and with an appreciating dollar, risk appetite is likely to abate, and stock markets globally could lose momentum quickly.

In other words, if you are a trader, the trend is still up, for now. If you are a long-term investor, tread with caution, whatever the earnings reports may say to you.

I’ll end with one recommendation. Apple (AAPL) reported earnings this week, and broke to new highs on very heavy volume. This company is a superstar. If you are investing for the short- or long-term, you can’t go wrong here.

As the Dow Jones Industrial Average approaches 10,000, we can be sure that the media will represent a breach of that level as further signs of economic recovery. I consider such media-hyped milestones as generally unimportant in the long-term picture. However, from a technical perspective, round numbers can act as support and resistance, since many eyes will be watching as price approaches psychologically-significant levels. As the Dow tries to move over 10,000, CNBC will be providing the play-by-play, and traders will be placing stops both above and below.

At the same time, technical traders must consider the entire landscape, and should avoid attaching too much significance to a single technical factor. When considering the Dow, I generally track the Diamonds Trust ETF (DIA). Looking at DIA, the 100.00 price level roughly corresponds to the Dow 10,000. Taking a look at the DIA one-year chart, we can see the price has been trending higher since March, and is trading above its rising trendline. Price made a new high this week, albeit on lackluster volume. The 95-96.00 area is an area to look for support, considering the rising trendline, 50 day moving average, and prior low set on 10/2. In other words, we have a bullish chart here, with volume being the primary area of concern.

Looking at the monthly chart, we can see that price will run into the 200 period moving average around 106.00, provided it moves that high. We can expect this level to provide some stiff resistance for DIA in the event it rises above 100.00. Moreover, the monthly chart is certainly not bullish. We have a V-shaped move off the lows on steadily-decreasing volume as we approach the 200 period moving average.

All things considered, as traders we can use the Dow 10,000 level as one of many technical factors to influence our trading decisions in the short term. Long-term investors, on the other hand, should be very wary of this market, whether it trades above or below significant psychological levels. I continue to see this market as highly overvalued, propped up by government dollars and momentum. At some point the underlying fundamentals will assert themselves, and the market will again see considerable downside. Last week John Paulson’s Weekly Market Commentary was highly insightful. I have already re-read it several times, and plan to keep it close at hand for future reference. Here’s a sample, but by all means go and read the entire thing, and note that Paulson has been a star performer in this difficult market.

Many of my concerns about the markets in recent years have emerged because too often, financial market participants and policy makers focus on manifestations rather than causes and conditions. This is why investors produced the dot-com bubble, the tech bubble, the mortgage bubble, the debt-financed private equity bubble and the commodity bubble without thinking of the seeds of crisis that were latently emerging, or how violently they would manifest. Our policy makers have bailed out poorly run financials by creating massive federal deficits, and think they’ve solved the problem in the same way as someone who runs over a weed with the lawnmower. The roots have simply grown deeper, because the seeds are still there, but we’ve applied a few conditions in the opposing direction. Those of you who have read these missives for a long time know that my geopolitical views are largely the same. This is, because that is. This is not, because that is not.

We can have an overvalued market and the seeds of a bear market, but if we apply opposing conditions in the form of easy money in order to prop up the market and prevent the consequences of bad behavior, the seed will simply grow stronger, and its ultimate manifestation will be more powerful. We can have a mortgage market that is setting new records for delinquencies and foreclosures every month, combined with increasing unemployment and a heavy reset schedule on Alt-A’s and option-ARMs that is just now picking up. But we lower the bar on financial reporting, fail to restructure debt, and ignore the strengthening seed because we’re single-mindedly enthusiastic about the thin-rooted green shoots of stabilization – born solely of a burst of fiscal profligacy – then we’ll predictably be blindsided when the problems re-emerge.

Predictably blindsided. That’s happened again and again in recent years. And it happens when we fail to think about the seeds we are watering. If we look only for fruit and ignore the seeds of crisis, then every bit of fruit will be followed by crisis, and nobody will understand why.