If you had a chance to catch the article on page C5 in yesterday's The Wall Street Journal you probably found affirmation of what you already know about small cap stocks. It seems that Russell Investments (as in the folks from the Russell 2000 index, among others) have recently re-examined the stock market's performance coming out of recessions and they indicate there's strong evidence to suggest that small cap value stocks outperform all other coming up from the bottom.

Recent experience since the market bottom on March 9, 2009 further corroborates this thesis. We've already seen that the majority of gainers on any particular day have been small caps. Just look at some of the big gainers from just this past week: MAP Pharmaceuticals (Nasdaq:MAPP), SYMS Corp. (Nasdaq:SYMS), AgFeed Industries (Nasdaq:FEED), Central Jersey Bancorp (Nasdaq:CJBK), FreeSeas, Inc. (Nasdaq:FREE), Exelixis (Nasdaq:EXEL) and Dynacq Healthcare (Nasdaq:DYII), just to name a few.

And recently an analyst from Morningstar, Bradley Kay, looked back even further to 1931 and noticed that there was a big performance difference between large cap and small cap stocks during recessions and recoveries. He further stated, "small cap stocks very much lead out of a recession."

This was my strategy in 2001 through 2003 when I started my first small cap service, Growth Report, and continues to be my focus with my SmallCapInvestor PRO service (you can get more information HERE) as we've already put in 12 out of 13 winners for the year.

The time is now to load up on small cap stocks.

In today's trading news, as of 12:00 p.m. Eastern today, the DJIA and Nasdaq are posting minor losses while the S&P 500 is just barely above even from the opening bell.

Russell 2000 Index stocks are up 0.02% at 492.32, a 43.4% increase since the March 9, 2009 lows.

Small caps leading the market today include Green Plains Renewable Energy (Nasdaq:GPRE) up 30.6% in today's trading, Penson Worldwide (Nasdaq:PNSN) up 16.5%, and J Crew Group (NYSE:JCG) up 23.9% on beating analysts' Q1 EPS expectations: JCG reported earnings per share of $0.32 while analysts called for $0.10. Analysts are now revising their full-year 2010 EPS estimate to $1.15 versus an earlier estimate of $0.54.

*****The high close for the Nasdaq since the rally began was 1,763. Yesterday's close was 1,751. For the S&P 500, the high close was 929 and it closed at 906 yesterday.

I mention these levels because they are what traders are watching. Some believe that, since the indices haven't taken out prior highs, the recovery rally is overdone and that a sharp sell-off is coming. Others say the recession is ending, the economy is improving, and there's more upside coming. To them, any weakness in stock prices is consolidation for the next move higher.

It should be remembered that the Nasdaq is still around 800 points, or 32% of its 2008 highs. The S&P 500 is 660 points, or 42% off its 2008 highs. So it's not like the indices are anywhere near prior levels. Who's to say what should be a decent target for a recovering stock market?

*****We can always check price-to-earnings ratios. (I'll use numbers from the Wall St. Journal's Market Data Center. This is one of my secret weapons, but, since I'm here to help, I'll share the link so you can bookmark it --  http://online.wsj.com/mdc/public/page/marketsdata.html#calandeco )

For the S&P 500, the trailing P/E is 15, and the forward number, based on estimates, is 15.75. For the Nasdaq, the trailing P/E is 13 and the forward number is 18.

Neither index seems extended on a price-to-earnings basis.

Oil hit a new high at $65, and inventories in the U.S. have dropped 3 weeks running. Traders believe increased demand as a result of increased economic activity is coming sooner rather than later. And bond prices have been falling, which is what you expect to see when stocks offer a more attractive risk/reward scenario.

Of course, one could also say prices fall when traders know there is a virtually unlimited supply of Treasuries hitting the market as the government needs to raise a lot of cash.

But explaining away numbers can be a bad idea. Because when we do that, we're letting our own bias creep in. That's exactly what happened last year when the drumbeat of a coming crisis started. So many pundits explained the numbers away with rosy talk.

*****The unemployment rate is nearly at 9%. Most believe double digits are inevitable. And what's worse, some are saying that high unemployment of 6%-7% may persist for years. But that doesn't necessarily mean that corporate profits will get worse from where they are now. Perhaps the current P/E ratios for the Nasdaq and the S&P 500 are appropriate. Maybe there's even some upside.

In my opinion, what's worrisome is that the next shoe to drop is still the first shoe - banks. There's no doubt that the rally for financials has come on the government's dime (that would be your tax dollars and debt to be paid by your children and grandchildren, of course). Refinances, mortgage and consumer debt modifications, investment gains from TARP money - these are all one-off windfalls. They blew in, and they will very likely blow right back out. What then?

Bank of America (NYSE:BAC) currently has a forward P/E of 10. Compound annual growth for the next 5 years is 7.6%. BAC also has $225 billion more debt than cash. Quite frankly, I don't see any upside to BAC. And that makes me worry about the downside.

*****As you know, I've pointed out moments where it looked as though stocks were about to head lower with comments like "cracks are showing" or "the news cycle is turning negative." So far, no significant downside has occurred. Of course, that doesn't mean it won't.

Consumer confidence has been steadily rising, and stock prices show it. We're also moving into the summer months, which are traditionally the worst months for stocks. 

For now, the best advice is an observation - a trend is in place until it turns. There's no reason to simply sell or take downside positions now. But keep your eye in things, apply stop losses to your positions and we'll see what happens.

If you want to get a clearer idea of what's going to be happening in the markets, be sure to check out TradeMaster's Jason Cimpl sharing his thoughts on the SPX, which tracks the S&P 500. He's calling for the near term for a bullish trend. You can view the video HERE (no registration or sign up required).

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