Trading Idea: Watch Energy MLP Space in 2018

01/01/2018 6:00 am EST

Focus: COMMODITIES

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

JPMorgan Alerian MLP ETN closely tracks the energy MLP space and there is a good technical case that a new uptrend is in the very early stages. We’re seeing high trading volume at this level, asserts Bryan Perry, editor of Cash Machine.

As the 2017 stock market rally rolled along, it did so without the broad participation of the energy sector.

Heading into the month of December, it was pretty much thought that investors will book their expected losses in energy stocks to reduce taxes from the gains collected from the technology, financial, consumer discretion, industrial, healthcare and transportation sectors.

While the price of WTI crude made its way back up to $58/bbl. earlier this month, the energy sector still lagged under the notion that the coordinated production cuts by OPEC and non-OPEC oil-producing nations would at some point come to an end or endure widespread cheating, as has been the historical norm.

U.S. crude highest since mid-2015 on final trading day of 2017.

The risk was that it would make the production cuts useless. But instead, oil-producing countries have complied, as far as known, and now the market is firming up as tax reform lifts the view for accelerated growth for the United States that also will benefit the global economy.

It is as if there is an epiphany by investors in the demand-side part of the supply/demand equation that a genuine rebalancing is possible without the intervention of production manipulation. And it’s not just tax reform that is triggering the rally in energy stocks, economic data around the world is showing global synchronization of growth, according to investment research firm CFRA.

“For the second quarter in a row, all 45 countries tracked by the Organization for Economic Cooperation and Development (OECD) showed year-over-year growth in gross domestic product growth (GDP) in the third quarter,” investment strategist Lindsey Bell wrote recently. “CFRA views such broadening of growth an important sign of world health and a positive for the international outlook.”

This most recent proclamation of forecasted strong growth by the OECD has the investors feeling like another leg to the bull market is about to take hold, providing a fresh bid under not just the energy sector, but the commodities and materials sectors as well.

Stocks of copper, steel, cement, fertilizer, wood and other deep cyclical commodities are seeing a rather sudden wave of new interest, something of a wake-up call even for value investors. While there have been two or three short-term commodity-related rallies this past year, they all petered out after a few days, making the current rally suspect as well.

However, the evidence of global economic reflation is widespread and not just regional. There is a growing case for taking this nascent rebound in the cyclical commodity sectors seriously and, for income investors, that would mean targeting some of the beaten-up energy master limited partnerships (MLPs) that have been bumping along the bottom of their 52-week ranges all year long. Most have been left behind as road kill this year amid steep losses, but now there is a pulse being felt among some of the stocks, of which some sport double-digit-percentage distribution yields.

Looking at the chart of the JPMorgan Alerian MLP ETN (AMJ) below that closely tracks the energy MLP space, there is a good technical case that a new uptrend is in the very early stages of being established.

We’re seeing a high level of trading volume at this level where a reversal of trend looks to be shaping up. It’s still very early to call it a new bull trend, but this development bears close watching. If it is a turning point, then the opportunity for strong outperformance in 2018 is excellent.

chart

In case you missed it, I encourage you to read my article from last week: Liquified natural gas trading turns bullish with global shortages.

Personal note: I’m going to be one of the featured experts on The Legends of Wall Street Cruise from January 12-22, 2018. My subscribers are invited! For more information and to request a brochure, click here.

Upcoming appearances 

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Orlando MoneyShow, February 8-11, 2018: I’m delighted to return to the Orlando MoneyShow, where I will be giving a new presentation on "How To Profit From Hi-Tech Income," “Trading Tech Stocks for Juggernaut Profits” other workshops on generating high-yield income that are always a favorite with show attendees. Make sure to register at www.moneyshow.com and I’ll see you there.

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