Montreal, Canada

Small-cap stocks remain comfortably above their 200-day moving average in mid-November and have spearheaded the recovery off the March lows. But signs of weakness have begun to emerge over the last few weeks and might portend to a broader sell-off – long overdue at this stage of the historical rally.

Since March, the Russell 2000 Index of small companies has gained 75% compared to 64% for the S&P 500 Index – dominated by America's 500 largest companies based on stock market capitalization.

Since September 30, however, the Russell 2000 Index has tumbled about 4% compared to a 5% rise for the S&P 500 Index. And since August 31 the S&P 500 Index has risen 9% versus a 5% gain for the Russell 2000 Index.

Leadership has started to shift from small-caps to large-caps over the last three months and that might herald a defensive realignment among money-managers following torrid gains over the last eight months. Small stocks typically bust out of the gate at the start of an economic recovery and usually run out of gas before large-cap stocks peak; this action is consistent with the trend in corporate insider sales since August whereby most of the selling has occurred in the small-cap universe.

If small stocks led the recovery then it's fair to assume they will lead the next decline.

Many small companies are still shedding labor and are struggling to raise financing in a tight credit environment. American small business is responsible for about 40% of new employment; without a broad recovery in small business hiring it's hard to envisage a sustainable earnings rebound.

Corporate earnings have recovered since April but mostly at the expense of cost-cutting, not top-line revenue growth. That's also true for most large-cap companies in the S&P 500 Index; most companies have shed redundant labor and have dramatically reduced bloated inventories since late 2008. Still, organic revenue growth is absent in this supposedly new bull market.

If anything, S&P 500 Index companies might continue to receive a boost from a weaker U.S. dollar since about half of their sales are derived from overseas. That pales compared to small stocks, which are mainly domestic-oriented companies.

For global investors, most U.S. assets are cheap. The dollar has lost about 2/3s of its value vis-à-vis the EUR this decade making American assets highly attractive to foreign suitors – if they can secure the financing.

America's on sale. That's especially true when you price U.S. real estate in EUR or most foreign currencies; it's no wonder the Germans are invading parts of the United States with their mighty EUR, purchasing distressed commercial properties since last summer. But stocks in the United States aren't cheap like real estate or the dollar. The big bargains for value investors definitely lie in real estate in late 2009, not in common stocks or speculative bonds.