MLPs Are Beginning a Serious Breakdown

Joseph Cioffi |

We seem to be seeing a serious sea change in MLPs over the last few weeks, and it's something we should pay attention to. At least for the short term, it appears a correction is underway and it began when the index hit 410 back in January and has been down ever since in stair-step fashion. The sell-off is accelerating, however, and we are now about to challenge the 200-day moving average, which sits at just under 380. What is disturbing to me here is that MLPs bottomed in 2008, some three months before the overall market bottomed in March 2009. Now after a three-year huge bull run for this group, we have seen MLPs top out two months before the rest of the market, and now we are moving down in tandem.

Alerian MLP Index 4-10-12(Click to enlarge)

Another technical negative is reaction to news. Plains All American (PAA) for instance is down almost $2 today even though it announced a 2-percent quarter-over-quarter distribution increase. Now to be fair, MLPs usually don’t get a move on distribution announcements, but to see a 2-point loss on the news is disheartening. It's also not a good sign to see the MLP leaders like Kinder Morgan (KMP) and Plains pulling further and further away from their 52-week highs. The group is certainly telling us that the uptrend of the last several years is at least taking a pause, and we may be at the beginning of a sizable pullback.

Alliance Resource Partners (ARLP) is in a real mess considering their stock action lately.

Alliance Resource Partners ARLP 4-10-12(Click to enlarge)

It has been in free fall with the collapse in coal stocks and natural gas prices. It appears that we are getting a bounce after seven down days in a row, taking out 18 points. At $80, the stock was yielding 5 percent, and now in the low $50s, it is yielding over 7 percent. It is certainly attractive from a yield standpoint at these prices, but remember that this climb in the yield may be the market telling us that the $3.96 distribution is in question. So I would exercise caution in here and wait to see if the stock attempts to put in some sort of sustainable bottom. With the continued pressure in coal and nat gas stocks in general, one should bottom fish with extreme care.

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Companies

Symbol Name Price Change % Volume
EFM Entergy Mississippi Inc. First Mortgage Bonds 6.20 n/a n/a n/a 0
PAA Plains All American Pipeline L.P. 31.31 0.24 0.77 675,835

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