Smaller stocks are not only catching up to larger stocks, they're starting to do better. That normally happens near yearend in anticipation of the "January Effect" when investors favor smaller stocks. Chart 1 shows the S&P 600 Small Cap Index (PHY/SPX) relative strength ratio turned up. Chart 2 shows the Russell 2000 Small Cap Index (IUX) relative strength ratio has also turned up. Midcap stocks are right behind. Chart 3 shows the S&P 400 Mid-Cap Index (MID) ending just shy of its November high. Its relative strength ratio has bottomed as well. For the holiday-shortened week, the Russell 2000 and S&P 600 Small Cap indexes gained 2.3% and 1.9% respectively, versus a 0.05% gain in the S&P 500 Large Cap Index. Midcaps gained 1.5%. New buying in smaller stocks also served to broaden out the market's uptrend as it enters December which is usually the strongest month of the year. Another factor favoring small caps over large stocks is the rising dollar. That's because a stronger dollar hurts the earnings of large multinational companies that get most of their earnings from foreign markets. Smaller stocks are more closely tied to the U.S. economy.