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Bear Market My Ass, The Smart Money Is Loading Up...Watch For Small Caps

Welcome to my almost invisible little instablog here on Seeking Alpha. This is my little island in the cloud where I dare to suggest running against the herd, while most commentary seeks to shepherd the cattle to the slaughter house. The machinery of the markets pushes the sheep to buy inflated stocks that the smart money players are selling.

Or conversely, to sell low so that the big players can load up on the cheap. And that is what I think is happening right now in the broader North American markets.

FEAR

Are you afraid? Really really afraid? If you're not you should be, or rather you're supposed to be. If you're paying attention to news in the financial sector there's lots to be worried about.

The energy sector is getting pummeled due to the falling price of crude. That means massive job losses in exploration and drilling. It just doesn't pay to invest in finding new sources of crude oil and then drilling it when a barrel of oil is selling for just $30 or so.

The shale revolution which spurred so much growth? Fuhgettabouit!!! The experts are telling us it could be years before we ever see oil back at $100 again.

China!!! Oh my god have you heard about the slowing Chinese economy? If you haven't you're living under a rock. China has grown so much that they are now the world's second largest economy, and destined to overtake the US as number one on the planet. Obviously this is HUGE!!! Chinese growth has propped up the world economy for years now, so if they're slowing down...Look the hell out!!!

Have you heard what's happening to interest rates? They're going up and you know what that means don't you? If people have to pay more to borrow they're going to be spending less. I mean let's face it, the economy runs on borrowed money. The US Federal Reserve already hiked its key rate 25 basis points in December, and they're talking about 4 more rate hikes of similar size in 2016. How can this end well?

Alright, now that I've stoked the sense of panic that's inundating news feeds all over the world, let's take a breather and look at each element.

Oil prices

Yes its true that there are job losses in the energy sector, that's to be expected. But $30 oil also has an upside. It means cheaper transportation costs for both business and consumers. Money that was being poured into the tank can now be spent on other things. Someone who was budgeting for $100 in gasoline every week a couple of years back, he now has some extra Do RĂ© Mi in his jeans, and you know he's going to be spending it.

Low oil prices suck if you work in the energy sector, or are invested in it (that includes me, I am still holding a couple of energy stocks). But for pretty much every other sector of the economy its a big boost.

China

So China's economy is slowing? Really? Imagine if the US economy were to grow by 3% in 2016. Would that be a good thing? Considering consensus forecasts are calling for growth of 2.5%, obviously 3% would be outstanding.

So how badly is China's economy doing anyway? With all the talk about the world's second biggest economy slowing, it obviously will lag the US in growth right? Wrong. Chinese growth is forecast at 6.5% for 2016, more than double the growth expected in the US economy. Don't believe me? Here are some links:

economictimes.indiatimes.com/news/intern...

www.reuters.com/article/us-china-economy...

So why is there all this talk of China's economy slowing down if its forecasted to grow by 6 to 7% in 2016? Simple....for a number of years China's economy was growing over 10% per annum. Picture a car hurtling down the interstate at 110 miles per hour, its flying. Now picture it slowing down to say 70 MPH. Its still moving at an awesome clip, but it is slowing down.

That in a nutshell is the Chinese economy. When you hear or read that its "slowing down", that just means its going from unbelievable growth to just great growth.

Interest Rates

And finally that brings us to interest rates. And its true, they're moving higher. As noted the US Federal Reserve hiked its key rate .25% and is forecasting another 4 rate hikes of similar size in 2016.

But is this a bad thing? I am going to suggest that no it is not, quite the opposite in fact. Harken back to the great financial crisis that hit world markets around 2007/2008 and ushered in a decade long period of declining interest rates. Or previous to that the recession brought on by the implosion of the tech sector around the year 2000.

When interest rates first dropped in 2007 and before that in 2000 the markets reacted in bullish fashion, believing that cheap borrowing costs would prop up the economy. They didn't, they never do. Now that the US Fed is hiking rates it means that going forward the expectation is that the US economy is poised for bigger and better times.

When rates first drop, the reaction is swift and wrong. So too will the bearish reaction to higher rates prove misguided. View the central bank rate as a beacon to what's coming in the not too distant future. When rates go down, it means bad times are coming. But when rates start climbing, as has just happened, then look for better days ahead.

Now What?

Okay, so things are going to get better in the broader markets. When? And what are the smart plays? I won't offer any suggestions about specific stocks, that's a crap shoot. But I will suggest broader sectors and what to look for and what I think should be avoided.

As to the question of when, I'm not going to stick my neck out and say the markets will start recovering this month, or in the next two or three. But I will go out on a bit of a limb and say that I expect the broader North American markets to be firmly in bull territory by this summer, in June. That still begs the question of where to invest though, and I have very fixed opinions on the sector that will lead the bull charge.

Small Caps

The small cap space is often viewed as the canary in the coal mine. When a market correction is coming it is often the small cap space that struggles first. You can see it with the S&P Smallcap 600. Back in August that barometer started to struggle, and after recovering somewhat toward the end of the year it started to falter badly as 2015 came to a close and has carried over into 2016.

So I am going to suggest that, in my opinion, small cap stocks are likely to be the best bets in the near to medium term. But with that being said I will also place a huge caveat. Picking which small caps to bet on is much harder than identifying what a wider sector will do. Small caps often involve companies that are not yet profitable, and many of them never will be, which makes this a very high risk area to place money.

I would strongly advise against investing in any small cap that has already had a big run in the past 2 years. Money losing public companies will sometimes engage in secondary offerings to raise much needed capital. Often times these offerings are underwritten by large brokerages, which in turn have analysts that will begin putting out bullish recommendations. Its a dirty little game and I would not be the first to suggest this is a clear case of conflicting interests.

If you identify a stock that, in the past year or two, has gone from $1 to $10 or from $10 to $100, and has since come crashing down hard...I am going to suggest that you avoid this type of play. There are likely already a large number of retail holders who bought it at inflated prices, and they will provide strong headwinds against any major price appreciation.

Rather I would look for stocks that have NOT had a big price spike in the past couple of years, in fact the longer the decline or flat line the better.

I would also try to look at sectors that have the potential to become hot. Bio-tech is one area that runs hot and cold. When small cap development stage pharma companies start grabbing attention the ride can be wild. And likewise when the sector turns cold the drops can be devastating.

If you find a depressed biotech, that hasn't had a big run in a couple of years....then I would suggest that is something to look at. And if their cash situation is weak, they could be a candidate for a secondary offering, and as I noted before...bullish recommendations by analysts and other promotional outfits can do wonders for a stock's share price, even if the stock is being diluted.

Or maybe you know another sector that you think has big potential. I have some money invested in junior Lithium mining based on my belief that with Tesla and other battery storage needs growing, that the broader Lithium mining sector could become as hot as Medical Marijuana was a year or two back.

The comment field is always open here. I would welcome any suggestions about broader sectors that readers think might have the potential to grab the attention of the market.

Good luck in any case, and here's to a healthy and prosperous 2016.

DISCLAIMER

This is strictly an opinion piece, and my opinion(s) could very well turn out to be wrong. This instablog post is intended strictly for informational and entertainment purposes and should not be used as a basis for any investment decisions. Verify all information presented, while I have endeavored to ensure accuracy I do not warrant that any or all information presented is without error.

Investing in stocks or options involves significant risks. For investment advice you should seek the input of a professional.

Additional disclosure: You can find me in numerous forums where I use the names krill66 (yahoo) growacet (stocktwits) and ledrog (stockhouse).