With the ongoing EU sovereign-debt crisis conjuring painful memories of the 2008-09 financial crisis for many investors, bigger-picture concerns drove global equity markets in 2011. A surge in market volatility and the increased correlation between stocks reflect the primacy of macro developments over stock-specific news and catalysts.

Volatility is the degree to which a particular stock or index fluctuates in value over time. Many investors monitor the Chicago Board Options Exchange Index (VIX) to gauge the implied volatility of the S&P 500. Higher VIX readings suggest that traders expect market volatility to increase.

Source: Stockcharts.com

In 2011 the VIX closed between 40 and 50 on a few occasions. Although these spikes fell well short of the record high of 89 that the VIX hit at the height of the financial crisis, the volatility index’s 2011 highs were roughly on par with its peak during the 2000-01 tech bust.

Traders use the VIX to gauge investors’ fear and often buy stocks when the VIX surges–an indication that sentiment may have bottomed. By the same token, when the volatility index remains elevated for a prolonged period, that’s often a sign that investors are worried about macro-level risks that could affect all stocks.

The VIX climbed at the end of the 21st century, when investors discovered that the fervor surrounding high-flying technology stocks had inflated expectations to unrealistic levels. The implosion of Pets.com–a company that had a successful marketing campaign but lacked a viable business plan–represents the worst of the Dot-Com craze. Major accounting scandals that brought down WorldCom and Enron Corp also shook investors’ confidence.

The VIX went through the roof after Lehman Brothers declared bankruptcy and remained elevated until spring 2009, reflecting questions about the ongoing viability of the world’s leading banks and fears that the global financial system was on the verge of a complete meltdown.

Finally, the VIX spiked last summer amid concerns that the EU’s ongoing sovereign-debt crisis would touch off a second credit crunch akin to what happened in 2008.

Correlation, which measures how closely the prices of stocks or indexes track one another, likewise indicates the extent to which traders are focused on macro-level risks. Securities that are correlated 100 percent would rise or fall in lockstep, while a stock that exhibits a 30 percent or 50 percent correlation to the S&P 500 would exhibit more independence in its movements.

Savvy stock-pickers thrive in periods of low or declining correlation. When stocks move in different directions, traders can reap huge gains by buying the winners and avoiding or shorting the losers. By contrast, investors have a tougher time beating the indexes when stock prices tend to move in concert because the opportunity to outperform decreases.

This graph tracks the rolling six-month correlation between the S&P 500 and the S&P 500 Energy Index from June 2000 to the end of 2011. Although the correlation between these two indexes averaged 63 percent over this period, this relationship tends strengthen when investors worry about macro-level concerns.

Source: Bloomberg

The six-month rolling correlation between the S&P 500 and the S&P 500 Energy Index reached a record high of more than 92 percent in 2011, reflecting the prevailing risk-on/risk-off trade that’s been the subject of much discussion in the financial media.

When discouraging economic data or news from Europe weighs on investor sentiment, investors sell stocks en masse, without regard for the stock or industry’s underlying fundamentals. Conversely, in these markets, a tidbit of good news is often enough to lift even the riskiest names.

High correlation and volatility are often bad news for investors because it makes it tougher to outperform the market through savvy stock selection. In addition, heightened volatility can terrify for investors, many of whom were traumatized by the market’s implosion in late 2008 and early 2009.

But volatile markets also present enormous opportunities for investors who are willing to take advantage. Here’s a quick guide to successful investing in this bipolar market.

• Heightened volatility and periods of high market correlation tend to be mean-reverting. That is, these perilous times eventually give way to periods of greater calm that rewards superior stock selection. For example, market volatility and correlations generally declined between 2004 and 2007. Timing such a shift is a fraught enterprise, but if history is any guide, we’re due for a more benign market environment at some point in 2012.
  
  
• Many energy-related stocks and industries have closely tracked moves in the broader market, but there are some noteworthy outperformers. Whereas the S&P 500 eked out a 2.1 percent gain in 2011, the Alerian MLP Index–a benchmark for master limited partnerships (MLP)–returned 14 percent. Our emphasis on MLPs, oil and gas royalty trusts, and Super Oils since summer has paid off; many of our favorite names outperformed over this period.
  
  
• In volatile and highly correlated markets, investors tend to throw the baby out with the bathwater. The increasing popularity of exchange-traded funds (ETF) has contributed to this phenomenon by enabling investors to buy and sell baskets of energy-related stocks. We’ve highlighted a number of opportunities over the past several months for investors to buy high-quality stocks at substantial discounts. As panic subsides and investors focus on stock- and industry-specific stories, our favorite names should rally substantially.
  
  
• When volatility rules the tape, investors should hold a few hedges that outperform when the market dives. The model Portfolio has long included a handful of short positions that target individual names and sectors that face headwinds. We recently broke these short positions out into a separate Hedges Portfolio to ensure that these names aren’t lost in the shuffle. Our short position in Diamond Offshore Drilling (NYSE: DO) generated a roughly 13 percent gain in 2011, while we booked a 43 percent profit  by covering our short sale of First Solar (NSDQ: FSLR), a leading producer of thin-film solar panels. These gains offset some of the losses posted by cyclical names.
  
  
• Investors can reap a quick return from shorter-term trades in volatile markets. Although The Energy Strategist usually steers clear of one- to two-day trades, we occasionally speculate on shorter-term trends. For example, the Aggressive Portfolio currently contains a bet on West Texas Intermediate (WTI) crude oil through US Oil Fund (NYSE: USO). We initiated the position in a Flash Alert issued on Nov. 7, 2011, and expect to close the trade for a profit in coming weeks.

Economy and Broader Market: 2011 in Review

In a macro-driven and highly correlated stock market, investors must dedicate significant time and effort to evaluating the health of the US and global economies.

The Energy Strategist follows a handful of economic indicators that have proved their worth over many years.

With the welter of information that’s available today, you’re sure to find statistics or indicators that justify any economic outlook or investment thesis. Remember that the goal of any forecast is to predict the future based on developing trends; validating a preconceived notion isn’t useful, especially when the process ignores conditions on the ground. Meanwhile, monitoring too many data points often leads to information overload, a crippling condition that also leads to its fair share of ill-advised decisions.

Before I delve into my 2012 outlook for the economy and stock market, let’s revisit the market and economic forecast from The Energy Strategist’s Road Map for 2011.

• That the US economy’s momentum at the end of 2010 would continue and gross domestic product (GDP) would expand by roughly 3 percent–a bullish outlook given the circumstances, but well below historical standards.  
  
  
• That China and other emerging markets would tighten monetary and fiscal policy to curb inflation and to prevent their domestic economies from overheating while maintaining sustainable growth.
  
  
• That the S&P 500 would finish the year at between 1,400 and 1,500–a gain of 10 percent to 15 percent.
  
  
• That energy stocks would outperform once again in 2011.
  
  
• That the EU’s ongoing sovereign debt-crisis represented the biggest downside risk to the global economy and markets.
  
  
• That the US stock market would suffer a correction of 5 percent to 10 percent at some point in 2011.
  
  
• That the potential for the US economy to grow at a better-than-expected rate represented the biggest upside risk to my forecast.

Although the US Bureau of Economic Analysis has yet to release its preliminary estimate of fourth-quarter GDP, data released during the quarter suggest that the economy grew roughly 3 percent in the final three months of 2011. In that scenario, full-year GDP growth will likely come in at about 2 percent–1 percentage point less than my initial forecast, a significant margin of error.

Two events conspired to slow US economic growth in the first half of 2011: a spike in oil prices after civil war in Libya curtailed the country’s energy exports, and disruptions to manufacturers’ supply chains in the wake of the magnitude-9.0 earthquake that devastated Japan’s Tohoku region in March. Both events were tail risks, or largely unpredictable developments that have significant consequences.

We analyzed these developments at length in subsequent issues of The Energy Strategist, especially the May 18 issue, The Big Picture. Not surprisingly, the economy’s summer swoon prompted a chorus of vocal pundits to once again call for the US to slip into recession. But as I emphasized throughout the summer and early fall, the likelihood of the US economy suffering a prolonged contraction remained slim. In fact, I repeatedly called for US GDP growth to accelerate because of lower oil prices and the restoration of capacity in Japan’s manufacturing sector.

My outlook for China and the emerging markets also panned out. After a spike in oil and food prices pushed year-over-year inflation rates in China to 6.5 percent in July, Beijing responded by hiking interest rates and requiring banks to hold more capital in reserve. Nevertheless, China still managed to expand its GDP about 8.5 percent in the fourth quarter, a sustainable growth rate that we expect the nation to maintain through 2012.

However, my outlook for the S&P 500 proved too optimistic: The index posted a total return of 2.1 percent on the year, well short of my call for a 10 percent to 15 percent gain. My forecast appeared to be spot on through early May, with the S&P 500 up 9 percent over this period. But weaker economic data and renewed concern about the EU’s sovereign-debt crisis sent the index sharply lower.

The S&P 500 Energy Index likewise surged through early May, running up almost 17 percent, before succumbing to a summer swoon that persisted into fall. Nevertheless, the S&P 500 Energy Index technically outperformed its parent index in 2011, returning 4.7 percent.

In this topsy-turvy year, my biggest upside and downside risks came to pass, which explains why the stock market frustrated bulls and bears alike. The EU’s political bumbling and inability to produce a credible response to the Continent’s debt crisis drove up Italy’s borrowing costs and sparked concerns about a second credit crunch. These fears culminated in a brutal third-quarter selloff that eliminated much of the gains bullish investors had accumulated in the first half of 2011. At the same time, bears who gave up on the market because of what they perceived as an impending Armageddon missed out the S&P 500’s largest fourth-quarter rally in almost a decade. Much of this late recovery stemmed from improving economic data, led by a rebound in consumer activity.

Investment Strategy: The Good, the Bad and the Ugly

My biggest mistakes in 2011 were not assuming additional hedges in April and May and not taking some profits in cyclical names that had rallied in the first half of the year. We did book a 105 percent gain on shares of International Coal after the firm was taken over by Arch Coal (NYSE: ACI), but we should have also locked in some of our big gains in Peabody Energy Corp (NYSE: BTU) and other winners.

Nevertheless, this strategic error was somewhat offset our commitment to short positions in First Solar and Diamond Offshore Drilling throughout the rally in the first half of the year. The 43 percent gain we booked when we cashed out of First Solar proved to be the model Portfolio’s biggest winner in a difficult third quarter.

Fortunately, my biggest success came when panic reached a fever pitch: With the market selling off after Standard & Poor’s downgraded the US’ sovereign credit rating, we counseled readers to keep a cool head and follow a three-pronged investment strategy to weather the storm. We first outlined this approach in Don’t Panic: Opportunities Abound, a Flash Alert issued on Aug. 8, and reiterated this strategy in the Aug. 23 Flash Alert, Strategy Session.

Here’s a quick review of my game plan for making the most of a difficult market.

1. Buy Yield: Investments that offer favorable yields and the potential to generate steady income over time will remain in high demand. For most of the 20th century, dividends accounted for at least half the total return generated by the stock market. Income investing fell out of favor in the late 1990s, but dividend-paying equities will be essential if you want your portfolio to outperform in this 21st century.

Fortunately, the market routs that periodically occur in uncertain times offer savvy investors an opportunity to scoop up our favorite high-yielding stocks at a discount. Many of our top picks have limited exposure to economic conditions or commodity prices; their dividends should remain intact, regardless of broader conditions. These periodic selloffs reflect spillover from a weak market, as opposed to company-specific problems. This gives you the opportunity to lock in high yields that will help sustain your portfolio through any downturn.

Our strategy focused on high-yielders such as oil and producer Linn Energy LLC (NYSE: LINE), midstream giant Enterprise Products Partners LP (NYSE: EPD) and offshore contract driller SeaDrill (NYSE: NYSE). If you bought all three of these stocks at the close of trading on Aug. 8, you would have scored an average gain of 15.5 percent through year-end, compared to the S&P 500 Energy Index’s 3.7 percent return and the S&P 500’s 5.9 percent return.

In several issues during the fall and winter, we introduced coverage of a number of oil and gas royalty trusts, some of which yield more than 10 percent. The volatile market gave us a golden opportunity to add SandRidge Mississippian Trust I (NYSE: SDT) and Chesapeake Granite Wash Trust (NSDQ: CHKR), which handed us a 36.1 percent and 29.6 percent total return, respectively.

2. Buy Long-Term Growth on the Cheap: Shares of coal mining firms, small exploration and production companies and oil-services outfits tend to endure bigger price swings than the broader market.

For example, the Philadelphia Stock Exchange’s Oil Services Index has exhibited a beta of 1.40 over the past five years; the S&P 500 Energy Index, on the other hand, has a beta of 1.07 over the same period. A beta of 1.0 indicates that a particular sector tends to move at about the same speed and in the same direction as the S&P 500. Betas of greater than 1.0 imply more volatility; betas of less than 1.0 suggest less volatility.

In August and September, some subscribers asked why shares of oil-services giant Schlumberger (NYSE: SLB), coal producer Peabody Energy Corp (NYSE: BTU) and Bakken-focused driller Oasis Petroleum (NYSE: OAS) pulled back more than the broader market.

None of these corrections stemmed from stock-specific factors; all these companies have solid growth prospects. Investor conditioning is the culprit. When the outlook for global economic growth dims, investors sell oil-services stocks and other higher-beta names first. It’s part of the playbook. High-quality stocks that were badly battered in the second half of 2011 will look like attractive bargains six to 12 months from now.

Shares of Schlumberger and Oasis Petroleum have already rallied from their 2011 lows and should continue to climb.

3. Stay Hedged: As I mentioned earlier, our short positions in First Solar and Diamond Offshore Drilling helped offset some of the damage sustained during the third-quarter selloff.

All told, investors who followed this three-pronged strategy dodged the worst of the market volatility. In the second half of the year, my Best Buys Portfolio–a list of my top picks in the current environment–averaged a loss of 4.4 percent. Although I’m never satisfied with a negative return over a six-month time frame, this positioning largely preserved investors’ capital at a time when the S&P 500 Energy Index gave up about 6 percent and the Philadelphia Stock Exchange Oil Service Sector Index plummeted 18.7 percent. Moreover, the Best Buys Portfolio (formerly the Fresh Money Buys) finished the year in positive territory.

Economy and Broader Market

I’m cautiously bullish about the prospects for the economy and global stock markets in 2012, though three major risks are on the horizon in the back half of the year: Uncertainty related to what’s likely to be a contentious presidential election the future of US tax and fiscal policy, as well as the EU’s sovereign-debt albatross. All these threats are political and could overshadow any encouraging economic developments.

These uncertainties complicate my 2012 outlook. Based on corporate earnings and economic fundamentals, the S&P 500 should rally 10 percent to 15 percent in 2011. But investors should expect above-average volatility at least until after the 2012 presidential election. Here’s my outlook for the US and EU economies, as well as the emerging markets.

1. US Outlook

The US economy shouldn’t lapse into recession this year, though GDP will grow a lackluster 2 percent to 3 percent for the full year. My rationale for this forecast is simple: The US economy has strengthened substantially heading into 2012. Let’s examine the data.

This graph tracks the four-week moving average of initial jobless claims, or the number of people who file for first-time unemployment benefits in a given week. This classic leading indicator tends to spike when companies are stepping up layoffs, a trend that augurs a higher unemployment rate and lower consumer spending. Most economists track the four-week moving average to reduce noise.

Source: Bloomberg

In 2007 initial jobless claims surged a month or two before the US recession officially began in December. The number of people seeking first-time unemployment benefits climbed sharply into mid-2008, a sign that the nation was mired in a deep recession. Investors who heeded this warning and reduced their equity exposure were able to dodge some of the coming carnage. Likewise, initial jobless claims spiked in late spring 2011, signaling that the economy had entered another short-lived soft path.

But conditions have improved of late, suggesting that the labor market is healing gradually. The four-week moving average of initial unemployment claims has plummeted to 375,000, compared to about 425,000 at the beginning of 2011. Monthly gains in private payrolls also corroborate these improvements.

Several subscribers have asked if these encouraging signs simply reflect an uptick in hiring for the holidays, but the Bureau of Labor Statistics adjusts the data based on past history to smooth out any seasonality. No seasonal adjustment is perfect, but the government does add to the claims figure during the winter to reflect the normal seasonal hiring trends.

With the economy gaining momentum, investors should expect modest payroll gains throughout 2012 that will gradually lower the unemployment rate and support a moderate uptick in consumer spending. However, households will likely continue to pay down debt and save more money than in previous recovery cycles.

The Conference Board’s Purchasing Managers Index (PMI) for the manufacturing sector of the economy is another important indicator to watch. Note that PMI readings greater than 50 indicate an uptick in manufacturing activity, while readings less than 50 imply a contraction. A PMI reading near 45 usually indicates a US recession.

Source: Bloomberg

PMI tumbled sharply in spring 2011, largely because of disruptions to global supply chains after a powerful earthquake and tsunami hit Japan in March. In August, the consensus forecast called for PMI to breach 50 and sink to levels commensurate with a recession. But the exact opposite happened: PMI arrested its fall and rebounded in the final months of the year.

The current PMI reading is consistent with US economic growth of almost 3 percent, though the overhanging risks in Europe and the US election cycle will likely lead to lumpy growth in 2012.

Finally, let’s turn our attention to the economy’s circulatory system: the weekly data on railcar loadings from the Association of American Railroads (AAR). In general, the economy is on the upswing when the number of railcars loaded with freight deliveries trends higher.

Source: Association of American Railroads

This graph shows the total number of train cars that were filled with freight and shipped in the US in a given week. You can clearly see some upside and downside spikes in this data. For example, railroads partially shut down during key holiday weeks like Christmas, Thanksgiving and the Fourth of July, so traffic normally declines. But the broader trend is clear–train carloads declined sharply from 2007-09 amid a period of broader economic weakness and a global credit crunch. But since 2009, there has been a steady, yet gradual increase in train carloadings. The number of shipments actually reached post-recession records in the final months of 2011.

This data is produced by the AAR, an industry body with no connection to the US government. It’s encouraging to see that the AAR data supports the stronger economic data that’s been issued by the government–including the drop-off in US initial jobless claims and the bounce-back in US manufacturing activity.

I regard the AAR traffic data as a coincident indicator of US economic health because it tends to weaken at about the same time as the economy weakens. For example, you can see deterioration in US carloadings data at the end of 2007, just before the US recession officially started in December. The strength in carloadings today suggests that the near-term risk of a US recession is low.

Because trends in railcar loadings are part of my proprietary Recession Radar indicator, any decline in transport activity would tend to push up the odds of a US recession as calculated by the indicator. Currently, my Recession Radar shows about a one-in-five chance of recession over the next six months and those odds have been steadily declining since late summer.

Although the US economy accelerated in the fourth quarter, I will continue to monitor my favorite indicators for any signs of a slowdown, particularly in the second half of 2012. Investors always get jittery during presidential elections–after all, the markets abhor uncertainty.

There is a real risk that markets will begin to focus on rising taxes in the second half of 2012. The economy in 2013 will slam into a wall of new taxes if the federal government fails to pass legislation to delay or cancel planned tax hikes. (See “Great Wall.”)

Source: Personal Finance, Joint Committee on Taxation, Congressional Budget Office

A compromise extending the George W. Bush-era tax cuts or postponing planned tax increases related to the Patient Protection and Affordable Care Act looks highly unlikely, at least until after the election. The future of US tax policy will be a major issue when the presidential election cycle heats up next summer. Accordingly, the economy could slow significantly in the second half of 2012.

On the positive side, the US housing market has a slim chance to surprise to the upside in 2012. Although the market is another two to three years away from “normal,” the healing process could accelerate as the overhang of foreclosures abates. Any improvement in the housing market would provide a welcome boost to consumer sentiment.

2. EU Outlook

That being said, the ongoing sovereign-debt crisis in Europe is unlikely to blossom into a global credit crunch along the lines of what transpired in 2008.

Although the EU is far from resolving the challenges facing its fiscally weak members, policymakers appear to grasp the severity of the crisis and have begun to take concrete steps to address the problem. For example, the European Central Bank (ECB) offered financial institutions three-year loans at cut rates, a program that led banks to secure almost EUR490 billion in low-cost funding.

Despite criticism from some quarters that banks are hoarding this cheap capital rather than lending or reinvesting in sovereign bonds–and there’s likely a kernel of truth to these complaints–equity markets responded favorably to the move. The S&P 500 posted its best fourth quarter in almost a decade, while the Deutsche Borse German Stock Index (DAX) was up 7.2 percent and Italy’s benchmark FTSE MIB Index managed to rally 2.5 percent.

The ECB’s three-year tender has also lowered the cost of borrowing money for Italy and other fiscally challenged states, at least in the near term. Check out this graph tracking the yields on Italy’s one-, three- and 10-year bonds. Note that the 10-year bond’s yield is reflected on the right-hand axis.

Source: Bloomberg

In November 2011, the rates on all three of these bond series spiked to more than 7 percent, the highest levels since founding of the eurozone. Conventional wisdom holds that Italy wouldn’t be able to reduce its debt burden if its borrowing costs remain above 7 percent for an extended period.

About the time the ECB first intimated that it would lend money to banks at a dramatic discount, the yields on Italy’s one- and three-year paper tumbled to 4.15 percent and 5.7 percent, respectively. The Mediterranean nation hosted a number of auctions in late 2011 that generally featured strong demand for shorter-term bills and bonds. In fact, Italy borrowing money at about half the rate the government paid about a month ago. However, demand for the nation’s long-term debt remains weak and yields remain elevated.

This discrepancy suggests that investors’ fear that Italy will default on its debt in the next one to three years have abated substantially. Nevertheless, investors are less convinced about where the nation will be by 2022. The decline in Italy’s borrowing costs on near-term debt may also indicate that banks are reinvesting some of the money borrowed from the ECB at 1 percent into sovereign bonds yielding 4 percent-plus.

Without question, the EU’s ongoing travails will produce their fair share of volatility in global equity markets this year. But policymakers appear willing to take the necessary steps to buy the embattled PIIGS (Portugal, Italy, Ireland, Greece and Spain) enough time to heal their balance sheets.

The EU’s sovereign-debt debacle could also provide a welcome upside surprise. Thus far, the ECB has been reluctant to move aggressively in the sovereign-bond market, but the central bank may step up its purchases of 10-year bonds issued by the Italian government to reduce the nation’s borrowing costs. Alternatively, the EU could use leverage to increase the size of its bailout fund or issue joint eurobonds. Any of these measures could catalyze a rally in global equity markets.

3. The Emerging Markets

Investors also overstate the risk that China’s economy will suffer a hard landing or that its stock market is the next bubble to burst. Inflation should continue to moderate in China and other emerging markets, which will give policymakers more leeway to ease fiscal and monetary policy to stimulate growth. For example, Beijing in late 2011 cut banks’ reserve requirements and could institute other growth policies in 2012. My current forecast calls for China to once again grow its GDP by 8.5 percent in 2012.

Strategy Update

In keeping with my cautiously bullish outlook for US equities and the energy sector, I’m reiterating my three-pronged strategy of buying dividend-paying names, adding high-quality growth stocks that trade at a discount, and using hedges and shorter-duration trades to generate near-term returns.

Although the overall strategy remains the same, I am making a few tactical changes to the model Portfolios.

ExxonMobil Corp (NYSE: XOM)

We added ExxonMobil Corp to the Conservative Portfolio in the Aug. 24, 2011, issue, Playing It Safe. We’ve cycled in and out of ExxonMobil over the years and last booked a 40 percent gain on the stock after holding the stock from July 2010 to June 2011. In August, we took advantage of the selloff that followed Standard & Poor’s downgrade of the US’ sovereign credit rating to pick up the stock at a discount.

As ExxonMobil is considered one of the safest names in the energy sector, the stock is often one of the first names investors buy when they return to the energy patch. My decision to sell the stock from the portfolio has nothing to do with the company’s fundamentals; rather, the stock rallied sharply in the final months of the year and appears overbought in the near term.

Among the integrated oil companies, I prefer shares of Chevron Corp (NYSE: CVX), which boasts the potential for superior production growth, and Italian energy giant Eni (Milan: ENI, NYSE: E), which offers a superior yield and value after the selloff of Italian equities. Sell ExxonMobil Corp and book a 17.7 percent gain. Chevron Corp rates a buy when the stock dips below 105, while Eni’s American depositary receipt is a buy up to USD52.

MLPs

Conservative Portfolio holdings Enterprise Products Partners LP, Kinder Morgan Energy Partners LP (NYSE: KMP) and Sunoco Logistics Partners LP (NYSE: SXL) generate a substantial percentage of their cash flow from pipelines and other fee-based business lines that have little exposure to commodity prices.  

Lured by attractive yields and the relative safety of the pipeline business, investors have bid these three stocks up to all-time highs that are well-above my buy targets. Although these MLPs have amassed long track records of distribution growth, the run-up in these names has reduced their yields substantially. Units of Enterprise Products Partners now yield less than 5.5 percent, while units of Kinder Morgan Energy Partners yield 5.5 percent. Units of Sunoco Logistics Partners–one of the safest MLPs in my coverage universe–yield barely 4 percent.

Calling a stock’s peak is a fool’s business, and all three Portfolio holdings could rally higher in the near term. At the same time, investors should not buy these MLPs at prices that are above my buy targets. I review these ratings closely and only adjust my buy targets when the company’s underlying business and growth prospects warrant a higher price.  

Be patient. The volatile market will give you plenty of opportunity to buy these names, particularly when investors’ appetite for riskier fare improves and they cycle out of these perceived safe havens. Investors should consider submitting a limit order to buy these MLPs at a price that’s somewhat lower than my buy target. Also, note that I will continue to send Flash Alerts to highlight particularly attractive buying opportunities.

Investors who have held these Conservative Portfolio holdings for some time and have accumulated substantial gains should consider taking some profits off the table to rebalance their portfolios. I’m also dropping Enterprise Products Partners from my Best Buy list for valuation reasons; Teekay LNG Partners LP (NYSE: TGP) will take its place in the Low-Risk section of the Best Buy list.

Enterprise Products Partners LP rates a buy under 45, while Sunoco Logistics Partners is a buy under 32 and Kinder Morgan Energy Partners LP is a buy under 75.

Oil & Gas Trusts

Units of SandRidge Mississippian Trust I (NYSE: SDT) and Chesapeake Granite Wash (NYSE: CHKR) have appreciated substantially since I added these positions to the Growth Portfolio this fall. Nevertheless, both names offer yields of about 10 percent and have ample scope to increase their distributions in coming quarters. (See The Yield Issue and Royalty Trusts: Buys and Sells.)

The recently listed stocks still trade at relatively thin volumes because their limited distribution histories keep them off the radar of many income-seeking investors, which makes them more volatile to the upside and downside. But once these names pay a full year’s worth of distributions, investor interest in these high-yielding oil and gas trusts will pick up considerably.

SandRidge Mississippian Trust I rates a buy under 30, but investors should buy the units aggressively on dips to 28. Chesapeake Granite Wash Trust rates a buy under 25; regard any opportunity to pick up the stock under 22 as a gift.