Investors Should Choose Quality as Charts Get Ugly

Joseph Cioffi  |

The charts continue to get uglier and uglier and MLPs are probably uglier than most. This is probably because the top here came two months before the rest of the market; much like the 2009 bottom came in MLPs about 3 months before the rest of the market.

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I argued then, and will argue today, that MLPs are in a leadership position and their decline here is signaling something perhaps more sinister for the overall market. Certainly, at this point we know that Europe is a big problem. We have seen the flight to quality in the 10 year with the yield collapsing to 1.44 percent last week (currently at 1.52 percent as of Tuesday morning) and the resulting blowout in MLP/10-year yield spreads to over 500 basis points. This could be a signal that there may be some strains developing in the banking system.

Now I am not predicting that this is the 2008 circling of the drain that occurred. However, I think we need to pay attention here that widening yield spreads are not a good thing at all. If Europe begins to go into a full-fledged meltdown mode, we will probably see sellers begin to throw everything out the window. The index started the week down 8 points yesterday and the index did not recover as the rest of the market did.

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So given all this, what is an MLP investor to do? Well, this might be one of those times that if you are going to be initiating new positions, one might do so in only the highest quality MLPs, which will hold up better than the rest of the group. Also this might be a good time to take a look at an MLP like Plains All American (PAA) for example which is held up better than most MLPs. But I would probably shy away from charts of companies which are showing the weakest relative strength. MLPs such as Nustar (NS) for example has been a chronic underperformer and I don’t think this sell off is the place to start hoping this MLP emerges as a leader.

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From the standpoint of the weekly charts we have taken out the sloping uptrend support and it looks like we are heading for the August 2011 lows down around the 320 level. There could be daily bounces along the way but from a weekly standpoint we are not at the point that makes such a bounce imminent. In MLPs we are down 10 out of the last 11 weeks. For the overall market we are down four out of the last five weeks. From the standpoint of where we are in this sell off, it seems to me we are early in the game. And when the bottom comes, my guess is that MLPs will bottom first before the rest of the market.

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