Small-Cap Allocations

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (The FRED Report) -- Over the last few weeks, the stock market has rallied in line with our projections. One salient feature of this rally has been widely ignored by most market pundits - and we discussed this in our last midweek report. This point is that Small Cap U.S. stocks have made all time highs, just as they have every year since 2099, affirming the uptrend that has been in place since the 2009 low. In addition, we showed that Small Cap US stocks have been a better investment than Emerging Markets names. We show those charts (of EEM and IJR) below, relative to the SPY.

We can see that on a relative basis emerging markets have lagged, as have European ETFs. However, we have arrived at a juncture where we believe some of the European ETFs are suggesting that problems in the Eurozone will be solved successfully. If this is the case, a relative trade in these areas may be setting up. We show charts of SPY, EWG, and EWI, below. Notice how both Germany and Italy have underperformed. While we believe this underperformance should last through the end of 2012, we may see a relative gain over the next two months as euphoria about a "European Solution" takes hold. This underperformance should then give way to realization that Europe still is less attractive than the US, and these indexes should fade in the second half.

We are advising subscribers to do the following: first, new money should go into US Small-cap and not Emerging Markets or Europe, on an investing basis. But, for those in these areas a strong rally could ensue over the next few months. Wait for this rally, and then we will likely reduce positions and allocations to international and add this money to US Small and Mid-cap, so that we can take advantage of this longer - term trend.

Fred Meissner is founder and publisher of The Fred Report. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report.�A detailed bio is here:Fred Meissner.