10 Reasons to Be Bullish

"Is anyone liking the long side besides me, Doug Kass and Ron Insana?" Jim Cramer wants to know. "Lots of bears here, lots of them, doubting every inch of the run."

In 2003, I was bullish before anyone else on this Web site was and, just as in 2009, perhaps a tad too early. There are many parallels between 2003 and the current market environment. I have developed several proprietary and original theories and statistics, which I have utilized over many years as a money manager and educator, that lead me to believe that now is, much like 2003 was, a great bullish opportunity.

Based on my research and experience, here are the 10 reasons why I have been optimistic:

1. Perceived or Implied Volatility: The VIX, which is a measure of perceived volatility , remains way too high. Too many newcomers to the market believe that at 30, it has corrected too far to the downside.

   The truth be told, that the VIX has an historical average of 20.13, with a standard deviation of 8.414. Thus, the VIX is now nearly one standard deviation above its mean. The market has much further to move to the upside.

   The VXO, which has a longer track record, has a historical average of 21.34 with a standard deviation of 9.53. The VXO is at about 29. Just like the VIX, the VXO is telling me that the market is poised to move higher.

2. Realized Volatility: In 2003, Cramer said: "We need to get away from the up-200 down-200 nonsense. We need to get away from explosions. We just need some sanity and peace." In response, I unveiled to the public for the first time the VDEV index, my proprietary measure of realized volatility. At that time that I unveiled the VDEV, the huge market swings drove it up and sent the market lower.

   The VDEV looks at the buildup of volatility over time rather than the perception of future volatility. Looking for spikes in the VDEV has yielded positive results. The VDEV remains at two standard deviations above its historical mean. As market behavior becomes more normalized, the VDEV will decline and equity markets will rise

3. Nouveau Technical Analysts: For a stretch of a few months, in the largest-scale style drift that I can recall, everyone seemed to become a technical analyst. There is nothing wrong with using technical analysis, but the massive migration of investors and traders in that direction left far too few fundamental and value-based investors relative to the cheap valuations in stocks. The reversion of this style drift will help build demand for undervalued stocks.
4. Negative Extrapolation: Across the media, it's been commonplace for people to say that the economy or markets are bad and getting worse. A game of "can you bottom this" has been being played out, led by the Axis of the Apocalyps -- Nouriel Roubini, Paul Krugman and A. Gary Shilling -- and spread across the investing landscape. The problem is that just as irrational exuberance pushes markets too far on the way up, negative extrapolation pushed the markets too far on the way down.
5. Interest Rates: Interest rates were driven to multigenerational lows along all points of the yield curve. This was a result of actions by the Federal Reserve, a systemic flight to the safety of U.S. government securities and the insatiable appetite of the Chinese central government for reinvesting its huge hoard of U.S. dollars. It was only a matter of time until government bonds could no longer rise, stocks could no longer go down, and a massive reallocation of assets into equities would begin. This capital migration will take almost as long to reach equilibrium as the flight out of equities to bonds took to occur.
6. That 70s Show: The severity, feel and duration of the 2008-2009 recession was more akin to the 1973-1974 recession than the Great Depression of the late 1920s. However, there is one major difference in the current recession vs. that of the 1970s: an absence of inflation. The bears tried to make us believe that inflation was imminent, but that proved to be a false prophesy. You had to live through the 1970s to fully understand what took place last year. Unfortunately, there are many market participants who did not experience the 1970s.
7. Striking Out on Their Own: At market bottoms, smart people strike out on their own. We started to see this as people such as Richard Bernstein and Meredith Whitney, both well-respected analysts, left their firms to strike out on their own. These individuals are the polar opposite of the margin morons who strike out on their own at market peaks.
8. The Crude Oil Stimulus: The dramatic fall in crude oil prices may have taken a few months to work its way through the system, but eventually the consumer received a huge windfall from the decline in energy prices. This resulted in more money finding its way back into consumers' pockets than any fiscal stimulus from Capitol Hill could achieve.
9. Balance Sheet Strength: With the exception of the financial sector and certain other companies, the balance sheets of corporate America have never been in better shape. Despite the recession, most companies still generated positive cash flow during the third and fourth quarters and paid down debt. Other companies were able to refinance long-term debt at much lower rates.
10. Level of Bankruptcies: While there have been plenty of big-name bankruptcies -- Lehman Brothers, Circuit City and now Chrysler -- the number of corporate bankruptcies is quite low relative to other recessionary periods.

So what can you do now?

1. Sell Volatility : Volatility will be trending lower. Use that as an opportunity to sell covered calls or sell naked puts. Here is a lesson in selling volatility.

2. Use Paired Trades: If you are still skeptical of further market advances but don't want to get caught short anymore, then consider relative performance paired trades.
3. Get Back to Basics: Eliminate your style drift and get back to the methods that have been successful for you in the past.
4. Follow the Winners: Seek out industry sectors that will benefit first and most from an economic turnaround. Early-cycle businesses such as technology will be market leaders, while energy stocks will be laggards. Prioritize best-of-breed over more-risky second- and third-tier competitors. Choose McDonald's(MCD Quote) over Burger King(BKC Quote), for example. Finally, while some companies have fallen prey to the devestation of the last two years, others have taken corrective actions during the recession. Choose the latter. A good example is Ford(F Quote), which is likely to avoid bankruptcy, the future of General Motors'(GM Quote) future is up in the air.

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