Here at The FRED Report ( www.thefredreport.com), we believe that the early July low is significant, and may ultimately turn out to be the low for 2010. If this is the case, what areas of the market will lead in the months ahead? Right now, leadership is murky, with many comments from prominent managers and analysts. Bill Miller at Legg Mason suggests large cap stocks will lead and Rich Bernstein, formerly of Merrill Lynch (and my old boss!) suggests that small caps will be big winners. Both of these arguments are based primarily on valuation, while we tend to look at things from a technical perspective. We discussed this today on our weekly conference call. Feel free to listen to the playback: www.thefredreport.com/articles/conference_072210. We have to come down in favor of the small cap and mid cap corner. The reason is that the small and mid cap indexes have made higher lows than the February 2010 correction lows, while the larger cap indexes exceeded those lows. Let's look at some examples. First, we look at the chart of the iShares Russell 2000 Index Fund (IWM). This ETF represents the Russell 2000 Index (^RUT) and is making higher lows. This ETF is focused on small and mid cap names. We note that the iShares Trust S&P Small Cap (IJR) (flash crash lows notwithstanding) has made a higher low, and this ETF is made up of small cap names only. The IJR suggests that smaller stocks are outperforming mid cap names. Turning to large cap ETF's, we see that the SPDR S&P 500 ETF (SPY) has exceeded the February 2010 low, but that the iShares S&P 100 Index ETF (OEF) has been weaker. The OEF represents the S&P 100 (^OEX) -- the 100 largest cap names in the SPY. We can see from this cursory analysis, that the smaller the capitalization, the less the market took the ETF out to the woodshed. As technicians and traders, we tend to buy strength and not weakness. Our fundamental justification for this is that smaller names tend to outperform after a recession and this outperformance can last for several years (for more detailed analysis of this, please read our Monthly Report: www.thefredreport.com/articles/researchpiece010110). At a minimum, we believe investors should maintain a liberal allocation to small and mid cap names.Disclaimer: This article does not constitute a solicitation or offer to buy or sell securities. Interested parties are advised to contact the entity with which they deal if they desire further information. No representation is being made that the information herein is accurate or complete. Any opinions or estimates contained in this communication represent the judgment of Fredco Holdings, Inc. at this time and are subject to change without notice. Fredco Holdings, Inc, its employees, officers, directors, principals, agents, affiliates or advisers may from time to time provide recommendations with respect to, acquire, short sell, hold or sell a position in, the securities or instruments named or described in any report or information being provided herein, provided however that no buying or selling activity will be taken with respect to a security referenced in a report by such parties within three days of such report's publication. The information contained herein was prepared by The FRED Report, which is solely responsible for the contents of this report. Although Fred Meissner, Jr. is a registered representative of Lamon & Stern, Inc., neither Lamon & Stern nor any of its principals, officers, affiliates, agents or employees is in any way responsible for the contents of this message. More detailed information, including actionable alerts, is available to Fred Report subscribers or 30 day free trial at www.thefredreport.com.