The past week was a disappointment for buyers of large company stocks, as the Dow fell 0.5% despite the massive interest rate cut by the Federal Reserve on Tuesday. But small cap stocks were actually on the move all week, as the Russell 2000 rose all but one of the days while posting a gain of 3.5%.

The fact that small caps are beginning to outperform large caps is a sign of a bigger set of events afoot in the global economy. Large companies are obviously multinationals, while smaller companies tend to focus on domestic U.S. sales. So whenever we see a big disparity in the performance between the two, it's a heads-up that investors believe there is an imbalance in the world.

The proxy for small cap stocks, the Russell 2000, has risen 26% since the lows of last month, while the S&P 500 large caps have advanced 18%.

These kinds of numbers are always a bit bogus when it comes to performance, since they assume that someone magically would have bought the exact bottom and held until today, but the idea is simply that there is finally a big disparity in two key asset groupings, and that is hugely useful for our effort to understand what is going on as well as our ability to do something about it.

Why Small Caps?

The advance of the small caps is a signal that investors have come to believe that the U.S. economy has a chance to grow faster in the coming months than the rest of the global economy. This differential persisted through most of the 2000-2003 bear market, and provided a way for nimble investors to hide out from the pain suffered in the broad market.

It's still too early to tell whether the differential will persist again over the coming year, but…