Option Buyer Sentiment Gauge remains at 2009 levels

Option buyer sentiment is at 2009 levels.  Is it too optimistic to expect a rally as significant?

Will small caps outperform through 2016?

The Russell 2000 has lagged the S&P 500 since early 2014 - approximately 2 years.  Similarly in 2011, small caps turned down first prior to the Euro Debt Crisis induced mini bear market.  The 5 year chart shows that small caps have lagged the S&P 500 significantly.  These trends don't last forever.  Small caps are usually the first out of the gate during a market uptrend and the first into the tank during a market downtrend.  If one were to assume that the bad news is now behind us and the market will begin to price in future growth, small caps should lead at least for short term and intermediate term.  Since the market bottomed in Feb, small caps have been leading the S&P 500 by a 2:1 ratio - significant early outperformance.

How much is oil worth?

How much is oil worth?  In my opinion, much less that its current price.  As illustrated above, the price of oil does not have a definitive long term price trend.  Analysts will often use supply and demand data in order to forecast the price of oil as they do with gold and other commodities.  They do not, however, take into consideration how technological evolution not only affects oil exploration, but oil usage.  Is it reasonable to assume that the world will consume more oil in the future than it does today?  I think the price of oil is based on approximately 75% public psychology and 25% current fundamentals.  It is short sighted to suggest that over time, a better technology won't replace oil as a primary source of energy (ie. solar).  Oil, other commodities, bonds and real estate tend to go up in price when global stocks are not (i.e. during a secular bear market).  We're now in a secular bull market for global equities that probably began in 2012.  Expect most commodities (including oil) to fall in price.  Based its historical price, a barrel of oil is probably worth around $30.

Small Cap Stocks To Lead Long Term

Everyone knows that small cap stocks are the canary-in-the-coal mine for the economy.  One can assess the strength of the overall global economy based on the performance of small cap stocks relative to large cap stocks.  They tend to outperform when business conditions are good (i.e. consumers are spending, fear is moderate, lenders are lending, interest rates are low, etc.)  During bear markets, small cap stocks underperform.  During bull markets, they outperform.  We are currently witnessing the beginning of long term small cap stock outperformance.

From a technical perspective, IWM which tracks the Russell 2000 small cap index, has broken out of a large ascending triangle pattern and is on its way to new highs.  We're just getting started...

The Good Depression

Things seem very bad right now.

All of the news media is extremely negative. This latest correction has very quickly brought all of the superbear doom and gloom economists (i.e. David Rosenberg, Nouriel Roubini, Eric Sprott, Robert Prechter, etc.) out of the woodwork once again to preach about The Demise of the United States, the Elimination of the Middle Class, the Continuing Decline of the US Housing Market, Rising Unemployment, and the fact that gold is the only safe place to be. There is even talk of war to stimulate the economy. It's almost as though there is a competition among analysts to see who can be the most negative or create the best negative brand. You may recall that the opposite was true in 2000, when it was cool to be positive.

Technically speaking, Japan has been in a "depression" since 1990. Currently, the Nikkei is en route to retest its 2008 bear market lows. If this correction worsens, Japan will lead us into the abyss. Fortunately, despite being in a 20+ year depression, Japan is a very nice place to live. They have the world's longest life expectancy, the best social programs for its citizens and are a much more culturally cohesive society that Europe or the west. I'd like to live in Japan, despite it being in a depression.

Yesterday, on the Lang and O'Leary exchange, Amanda Lang questioned David Rosenberg as to what an ordinary investor can do to protect themselves during another depression. Although Mr. Rosenberg may be a well seasoned and respected economist, his answer was poor. He argued that we're likely two thirds the way through this secular bear market which began in 2000. He recommended adopting laddered bond strategies to maximize yield and adopting long / short equity strategies to protect from a declining stock market. I'm skeptical that these strategies actually work to provide better than average returns over the long run. As a general rule, the more complex your investing strategy is, the poorer your long term results. I'd like to know David Rosenberg's 10-year portfolio return.

At least we'll know we're at the end of the Good Depression when the big banks start routinely selling laddered bond funds and long / short equity mutual funds to retirees.

How Low Will Japan Go?

An index to a country is what an ECG is to a heart patient. The Nikkei clearly illustrates that Japan has been in cardiac arrest since a major heart attack in 1990 following years of dietary excess.

Despite the fact that from a technical perspective it appears that all of the damage has been fully priced into Japan's economy, it is unlikely Japan will rebound dramatically anytime soon. Japan as an economy is still facing challenges greater than anywhere in the world. Their rapidly ageing population, lack of immigration, enormous debt to gdp ratio will hold their growth rate at a relatively low level for the forseeable future. Japan is a classic example of a perfect storm of problems that grind an economic system to a halt.

Putting things in perspective, Japan is simply in a really bad 20-year secular bear market that may be reaching its conclusion. It is important to realize that the run up prior to the decline that began in 1990 was faster and greater in intensity that the 1920s DOW or the 1990s NASDAQ. Growth was not modurated in Japan during this period. The chart went straight up. It only makes sense that the subsequent bear market would be deeper and longer as their economy consolidates.

I don't know enough about the fundamentals of Japan to make any predictions about a recovery. I do appreciate the fact, though, that the chart tells an interesting story.