Speculative Money to Small-Cap, Mid-Cap ETFs

In our last article, we wrote about "divergence bottoms" and how it looked as if the U.S. stock market was getting ready to make such a pattern. This now seems to have occurred and we believe that this could be the low point of 2011. In our last FRED Report "Midweek report" we opined that as long as the 1070 area holds, the market can rally into the end of the year.One of the interesting things about this rally is that the IWM has strengthened a bit more than the SPY, after trading weaker over the last few weeks. We show daily charts of these below.Smaller stocks tend to do worse when the economy is slowing and there are recession fears in the air. However, if we are correct and recession fears begin to fade, these mid- and small-cap stocks should start to improve on a relative basis. We show charts of the small- and mid-cap ETFs below.One question we have been asked is whether emerging markets will recover along with the U.S. markets.  We are not so sure, and indeed we can see a situation where foreign markets underperform U.S. markets into the end of the year. We have noted, in past FRED Reports that emerging markets may continue to act worse into the end of the year. We show charts of the BRIC countries below and readers should note where they are in relation to the 2010 lows, and then compare them to U.S. indices.We are suggesting to subscribers that speculative money may be better served in U.S. small- and mid-cap area. Those indices may very well outperform the SPY and foreign markets as well. We will monitor this in the weeks ahead and report as needed. >To order reprints of this article, click here: Reprints