FINANCIALS AND SMALL CAPS LEAD STRONG MARKET RALLY -- THE DOW AND NASDAQ HIT NEW HIGHS -- EMERGING MARKETS LEAD GLOBAL STOCKS HIGHER

SMALL CAPS HAVE STRONG DAY ... Although most of the reporting on today's rally will probably deal mainly with large cap market indexes hitting new highs or close to doing so, the day's biggest gains were seen in small caps. Chart 1 shows the Russell 2000 Small Cap Index climbing to the highest level since July and back above its 200-day moving average. Although small caps have been one of the market's weakest groups this year, the fact that they've started to attract some buying is giving the entire market a boost. Chart 2 is a ratio of the RUT divided by the S&P 500. The line had been dropping throughout most of the year, and especially since early July when the entire market weakened. The good news for now is that the ratio has shown a pattern of "higher lows" over the last month (see trendline). I doubt if anyone seriously expects small caps to regain their lead over large caps. But the ability of small caps to start to rally (and hold their own on a relative basis) is a positive sign for the market. The same is true for financial stocks.

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FINANCIAL BUYING TAKES WEIGHT OFF MARKET... Financial stocks were the day's strongest sector. That's a welcome change from what we've seen all year. Last Thursday's article on whether technology strength was enough to overcome financial weakness noted that, at the moment, both financials and technology were rising in the market's favor. That was certainly the case today. Chart 3 shows the Financials SPDR (XLF) bouncing strongly off its 50-day moving average. It's not in a major uptrend yet, but it's short-term trend is much stronger. The same is true on a relative basis. Chart 4 plots a ratio of the XLF divided by the S&P 500. After falling all year, the XLF:S&P ratio has stabilized since early August. That has taken a big weight off the rest of the market.

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DOW AND NASDAQ HIT NEW HIGHS ... The two biggest percentage gainers in the Dow today were Citicorp and JP Morgan, which reflected the market's new optimism on the financial group. That helped push the Dow Industrials through its July peak to a new record high. The Nasdaq Composite broke out to to a new six-year high. That continues the upside leadership coming from the technology-dominated Nasdaq since the spring. [The Nasdaq 100, which contains the largest Nasdaq stocks, broke out last week]. Some other big cap indexes, like the NYSE Composite and S&P 500, are nearing a test of their summer highs. Global markets were also strong, especially in Asia and Latin America. Several Asian ETFs (including Singapore, South Korea, and Taiwan) saw daily gains averaging 4%. The Brazil ETF (EWZ) gained 5%. All are trading at new highs. Other foreign ETFs hitting new highs were Canada (EWC) and Germany (EWG). The recent high in the Emerging Market iShares (Chart 7) shows a renewed appetite for risk and global stocks.

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