SolarCity: Poster Child for Nutty Solar Market

Source: Solar City | Facebook

SolarCity, with its shares up more than 50 percent in a little more than a week, may go down as the poster child of the sizzling market for this round of nuttiness for solar stocks.

Yet, as Raymond James analyst Pavel Molchanov is quick to point out, the market gains are after mixed first quarter results and second quarter guidance "that was definitely on the soft side, leading us to cut estimates for the second time this year."

Oh, and by the way, in less than 20 days, 60 million SolarCity shares, restricted since the company's IPO six months ago, will get unlocked, Molchanov said. If the stock continues the way it has been, he added, "this thing can go off the rails."

What's behind the latest super solar flare? Molchanov believes the current run in the likes of SolarCity, SunPower and Trina Solar "is, quite simply, an exceptionally violent short squeeze." Molchanov has been acutely candid in his assessment of the solar sector, recently calling out what he believes is accounting gimmickry at another solar company, First Solar, during an appearance on CNBC's Fast Money.

Molchanov goes out of his way in a report to say how much he likes SolarCity, the company. But he rates it a hold, noting that "for a textbook story stock like this, valuation does not always matter—at least not in the context of a broader market that is setting new highs virtually every day." But he also believes its current value "will be very difficult to sustain in a more rational market environment."

(Read More: The Solar Power Paradox: Boom, Bust or Both?)

One other thing, in a report on Tuesday, Molchanov said his checks with the solar distribution channel do not support the "boom times" solar stocks are suggesting.

Notably, he was struck by a conversation he had with a private Chinese solar manufacturer. (Historically, I've found that private companies can be excellent reality checks on public companies because they don't have a stock to hype or support.)

"Needless to say," Molchanov wrote, "they are as baffled as we are by some of the irrational exuberance in the share prices of their publicly-traded competitors."

My take is that we've seen this before. These irrational moves are occurring in sectors throughout the market, as the undercurrent fueled by low interest rates continues.

—By CNBC's Herb Greenberg. Follow him on Twitter:@herbgreenberg and Google+

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