The markets last Friday got a boost from Mubarak stepping down completely in Egypt.  The longer-term effects for our country and markets remain to be seen.  Even the short-term effects may be volatile. Saturday morning, Egypt closed down the Israeli embassy permanently.  Palestinians were celebrating in Ramallah.  Algeria has citizens protesting, in their capital city of Algiers, embolden by the events in Egypt.  We will need to keep a careful eye on the Middle East to see if the situation worsens.  As for now, it seems the rioting and protests are spreading.

That said, the markets liked the Egyptian news and all 3 major indices ended in the green.  The markets, by any technical measure, are “overbought”.  The DOW is more overbought than the S&P.  The sector showing the most weakness is the financial sector.  Breadth increased and included all the indices.

Emerging markets showed weakness as investors are beginning to price risk back in.  Gasoline prices hit a yearly high over the past few days.  Natural gas has been in a long-term bear market, but may again become bullish in the near future, especially if gasoline keeps rising.

I will be doing some research on ways to invest in the natural gas sector.  Some companies or LPs pay a nice dividend while you wait for your price climb.  Alternatively, you can invest in only a few ETFs or ETNs that follow natural gas.

The United States Gas Natural Gas Fund (“UNG”) is one way to invest.   Another is the iPath DJ-UBS Natural Gas ETN (“GAZ”).  Both use short-term futures contracts and are intended to closely follow the price of natural gas.  The United States 12 Month Natural Gas Fund (sister of UNG, “UNL”) is longer term and spreads out their futures contracts.  Volume is light on this fund so you need to be sure the liquidity is sufficient for you.

Alternatively, you can look at the companies that extract and produce natural gas.  Chesapeake (“CHK”), based in Fort Worth and EnCana (“ECA”) might be worth a look.  Again, I will be researching both of these companies as well as others to try to find the strongest players in the sector.

I have attached a graph of the iPath Natural Gas (“GAZ”) so you can see the long-term downward trend but I am waiting for a reversal.  Additionally, I have attached a graph of Chesapeake (“CHK”) so you can see that it has already reversed and is in a bullish trend.

iPath Nat Gas ETN GAZ 3 Mo Short Term 2/11/2011

iPath Nat Gas ETN GAZ 3 Mo Mid Term 2/11/2011

Chesapeake Energy CHK nat gas 5 mo Short Term 2/11/2011

Chesapeake Energy CHK nat gas 5 mo Mid Term 2/11/2011

Lastly, you could go with the Master Limited Partnerships, or “MLPs”.  They are the pipelines that transport oil and natural gas and are not so dependent upon the price of the commodity.  The biggest is Kinder-Morgan, (“KMP”).  It has a dividend of over 6%.  The MLPs often prove to be less volatile than the commodity itself and provide a nice income stream.

Alternatively, you can look at an MLP ETN that tracks the Alerian MLP Index.  The JP Alerian MLP ETN (“AMJ”) is probably the best known with the most volume.  There is a new Alerian MLP ETF (“AMLP”). This was designed for investors who want to own the underlying master limited partnerships or who do not want the extra work involved if K-1s are issued.  With the ETF, you get a 1099 and not a K-1, but you also do not get the tax benefits, so the work may be worth it.  Also, the MLP EFTs are set up as corporations so they have to pay the corporate tax rather than pass through the income to the investor entity so they may not be as profitable.

Also remember, with an ETN, you get the promise to pay the return and this promise is backed only by the issuer.  It is a senior, unsecured note.  With an ETF, you own the underlying companies, futures contracts or other assets.

Master Partnerships issue a K-1 for and this is extra work for many investors but it allows you to defer or shelter much of the “income”, which is really a distribution.  It is ALL about the net cash flow to you.  I don’t care what they call it, I just want the most “income” or cash in my pocket.

This might sound confusing to some.  If you need any help, please feel free to e-mail me or call me and I would be happy to visit with you.  The whole point is natural gas may become more bullish over the next few months depending upon how political events evolve.

With regard to the broader markets, we will have to see if breadth continues to increase.  If it does, and if is accompanied by an increase in buying volume, I will become more bullish.

Do They Know Something We Don’t?

With the exception of China, the Asian and European markets were both down in overnight trading yesterday. Hong Kong and some other Asian nations were down 2% or more. The European markets were tamer in their decline.

Our markets were negative going into the close, but seem to be rallying with 20 minutes to go. This coincides with investors’ belief that President Mubarak would announce his resignation and that the military would step in to restore order. However, he announced he would remain President until September but assign daily duties to his Vice President. As investors digested his speech, the markets rolled right back over and ended flat.

The Egyptian crisis is far from over with the Muslim Brotherhood waiting in the wings. As they say, this is really just the end of “Act One”. We need to pay close attention to this conflict.

Two days ago Mortgage Applications were down 5.5% and that does not bode well for real estate. Yesterday, Initial Jobless Claims came out better than expected but there was much speculation regarding what actually caused the improvement. Gradually, investors are becoming more skeptical of the data released.

Senator Jon Kyl of Arizona announced retirement. This is the 5th senator to retire in a year. Do they know something we don’t?

Also, a Federal Reserve Board Governor and top lieutenant to Ben Bernanke submitted his resignation Thursday. He has been a vocal critic of Bernanke’s bond buying program (QE & QE2) and just a day ago warned that if the dollar keeps falling and commodities keep rising, creating more widespread inflation, we should reconsider the FED’s strategy.

Hmmm… not a team player and resigned, but at least he told the truth…I like him already.

The markets seemed to have changed character in just the past two days. Investors seem more pessimistic. Last week, even bad news couldn’t make the markets go down. Today, however, we had good news on the employment front and from Egypt (supposedly), and the markets declined.

There are just more sellers now than there were even a week ago. We will have to pay close attention to any increases in selling volume as that is the key indicator for a selloff. For a continued strong rally, buying volume is essential. Right now, buying power is waning.

Finally, oil rose today and seems to have found a bottom and be gaining support. The Egyptian news that Mubarak will not resign as President until September should only provide further support for oil.

China just raised their interest rates again to ward off inflation. Most Asian markets were down because of this with the notable exception of Japan which was up about 1/4%. We will have to pay attention to emerging markets to see what effect the Chinese rate hikes have on their economies and markets, especially if China does, in fact, slow down. Again, emerging markets have been experiencing net outflows of capital.

The European markets were all up marginally except Italy. The internals of the European markets seem to be weakening and losing momentum.

Likewise, our internals are showing reason for concern. That being said, our markets still shrugged off the Chinese interest rate hike, yesterday. Even though the DOW finished in positive territory for the 7th day in a row, you need to remember that the markets never go straight up, or straight down. Total volume was slightly above average on the NYSE and slightly below average on the NASDAQ.

Up Volume on the NYSE was a mild 58% and just 53% on the NASDAQ as measured by Lowry Research. This does not imply a market gaining momentum. Likewise, Buying Power fell while Selling Pressure increased.

All the technical indicators are in overbought territory, including the 14 day Stochastic which just switched back to overbought levels. The markets are showing resilience but risk is rising. I like to be cautious during times of elevated risk and put my capital to work when risk is lower.

Bonds were down in price as yields, or interest rates, were higher. Likewise the US dollar weakened against other major currencies. It seems the inflation trade is back on as gold was up over $16 per ounce, or over 1%. But the big news, silver was up .94 cents, or 3 1/4%. Silver is back up over $30 per ounce finishing at 30.29. Silver is gaining momentum.

In fact, the active traders, Dr. Chris Katcher and Gil Morales, alerted investors today that silver hit a pocket pivot and is breaking out to the upside (essentially a breakout to the upside in volume, for a technical definition see these links: Technical Definition & Pocket Pivot Advantage). I have included their statement and chart so you can see what they are seeing. Additionally, you can go to www.selfishinvesting.com to view their research (DISCLAIMER: It is a paid site for their full research).

“We note with interest the move in silver today and over the past few days. Current volume levels as of 8:38 a.m. Pacific Time suggest that a pocket pivot type of volume signature might be setting up here, but this will become more evident as the day progresses. Below is a real-time chart of the nearest silver contract, from eSignal.”

Silver Hitting a Pocket Pivot (source: www.SelfishInvesting.com, eSignal)

Over the next few days, I will be watching for volume increases on either side, buying or selling. That will provide the strongest clues whether the broader market will in fact roll over and have a mild pullback like the probabilities suggest, or whether we will continue upward.

I would like to stress that the midterm uptrend is still intact; it is the short term that is in question.

The markets had an up day, yesterday, although all the major indices came off their highs in afternoon trading. Total volume was about average on the NYSE, but below average on the NASDAQ.

Lowrys tells us that Up Volume represented 77% on the NYSE and 69% on the NASDAQ. Bullish sentiment remains unusually high and all the technical indicators are pointing to overbought readings.

Much of the investment money globally has been moving out of emerging markets and into the US markets. Our “growth” seems to investors to be a better place to put their money. However, we have not had a pullback since November.

What does this mean? It means the market may go higher, but the risk is elevated. By most fundamental measures, the market is “fully” or fairly priced. In the short term, I intend to keep the sectors I already own and wait for a better entry point with the cash I have on hand. Patient, but ready and waiting.

What do the markets have in store over the longer term? I think that question is easier to answer, and if we look at overseas conditions, it will provide clues.

Indian interest rates have spiked and their bond sales are at 15 month lows. Businesses have said they will wait to issue new debt as it is too expensive now. When companies cost of capital it too high, this erodes their profitability. Growth rates are going down and fear is rising. This is reflected in the Indian stock market over the past weeks.

China has become a net seller of Japanese bonds. Their reasoning is “profit taking,” but the Yen has been weakening and I believe the Chinese are concerned about holding Japanese assets. The Japanese have had “loose” monetary policy for years but it has not worked. Their economy is in shambles and they are essentially bankrupt.

This is the tightrope our country and economy is facing. If we keep monetary policy loose in attempt to spur growth, we will have further inflation. It will be hard to raise new capital by issuing debt or rolling over existing debt. Interest rates will rise and profitability will be hurt.

If we defend the dollar by raising interest rates, we curb growth and job creation. This, by the way, will also cause the stock market to go down, way down. Do we inflate or defend the dollar?

I believe I know what our politicians and FED will do – PRINT. But, there is a growing momentum to curb spending and make deep cuts.

The way they choose to go will greatly change how you should invest. This is why, more than any other time in our history, politics will affect investments and asset prices.

Currently, you should already be out or limit emerging market investments. Emerging markets are experiencing net outflows. Bonds in the long run will lose, although we may get a short term “pop” if fear sets in, but this hasn’t happened yet. Cash and large cap stocks (energy and soft commodity stocks are currently the strongest) are the place of refuge. I, personally, am avoiding small and midcap due to the elevated risk.