S. Wade Hansen

Small-cap stocks are the place to be right now as the stock market passes the one-year anniversary of the sub-prime meltdown and the beginning of the credit crisis. According to relative strength measurements during the past month, if you are looking for the best place to weather the storm in the U.S. stock market right now, small-cap value stocks---as represented by the iShares S&P SmallCap 600 Value Index Fund (IJS)---and small-cap growth stocks---as represented by the iShares S&P SmallCap 600 Growth Index Fund (IJT)---are showing the most strength.

Relative strength is a measurement that tells you which stock, mutual fund or ETF is stronger when compared with another stock, mutual fund or ETF. It's like having an arm-wrestling match between each of the investments you are looking at and seeing which one comes out on top.

Knowing which investment is the strongest today is useful for you as an investor because the investments that are strong today tend to be strong tomorrow---unless something happens to weaken them. It's just like Newton's first law of motion, which states that every object in a state of motion tends to remain in that state of motion unless an external force is applied to it.

So why do I say small-cap stocks are the place to be right now? Well, let me walk you through the process.

I wanted to know, based on relative strength measurements, which market-cap style group was the best place to be right now. Should I be in large-cap value, mid-cap growth or some other group? To answer my question, I decided to evaluate the following ETFs, which represent the six major market-cap style groups:

- The iShares S&P SmallCap 600 Value Index Fund (IJS)
- The iShares S&P MidCap 400 Value Index Fund (IJJ)
- The iShares S&P 500 [LargeCap] Value Index Fund (IVE)
- The iShares S&P SmallCap 600 Growth Index Fund (IJT)
- The iShares S&P MidCap 400 Growth Index Fund (IJK)
- The iShares S&P 500 [LargeCap] Growth Index Fund (IVW)

While there are many different methods for calculating relative strength, the simplest and most widely used seems to be the Normalized Rate of Change method, so I decided to use it for this illustration. To calculate relative strength using this method, all you have to do is follow these five easy steps:

For those steps, results and a lot more free education - see the whole article here: http://www.learningmarkets.com/index...cks&Itemid=142