Right now, the 13-month line has yet to cross the 34-month line. But it will. And this suggests that smaller stocks have plenty of fuel left in the tank. We recently recommended fresh exposure to small caps via a position in the Vanguard Small Cap ETF (NYSE: VB) fund.

Red-hot Brazilian Stocks
During December, we saw foreign stocks, especially those in China, struggle as American stocks jumped to new highs. The populariShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) has lost 9.4% since it set a high in November. In comparison, the Russell 2000 has gained 14.4% since early November. This is part of the reason why we have trimmed exposure to foreign holdings.

We've recommended retaining a 15% allocation to Latin America and Brazil, however, for a very simple reason: They continue to find buyers. And there's nothing more bullish than rising prices.

One to look at is one of our long-term holdings,Companhia de Bebidas das Americas(ADR NYSE: ABV), a beverage company focused on the production and distribution of beer, soft drinks, across 14 countries in the Americas. Better known as AmBev the company bottles Pepsi products outside the United States, with operations throughout Canada and Latin America, including Ecuador, Peru, and Bolivia.

Another is Companhia Energetica de Minas Gerais(ADR NYSE: CIG) or CEMIG, which we've also recommended several times in the past year. The energy company mainly generates and distributes electricity but is also involved in natural gas distribution, telecommunications, and business consulting. It's majority owned by the government of the state of Minas Gerais, the second most populous and the fourth largest of the 26 states in Brazil, where it provides power to six million people.

U.S. Retailers Perk Up
Big-box retailers' stocks were disappointing in the past week after MasterCard Advisors' Spending Pulse latest data showed holiday sales increased 3.6% over last year. Compare this to the 2.3% drop of last year. Excluding the extra shopping day between Thanksgiving and Christmas, the gain was closer to 1%. Still, considering fears that the big snowstorm would freeze out Northeast shoppers, it was an acceptable result.

Digging deeper, the best selling holiday items according to the data were consumer electronics (up 5.9%), footwear (up 5%), and jewelry (up 5.6%). The last item is just another indication that consumers' recessionary mindset is fading: Last year, sales of jewelry -- the ultimate in discretionary purchases -- fell 30%.

Investors were impressed enough to boost the shares of teen retailersAmerican Eagle Outfitters (NYSE: AEO) andUrban Outfitters Inc. (NASDAQ: URBN). The latter hit a new one-year high and is a hug and a kiss away from a new all-time high.Amazon.com Inc.(NASDAQ: AMZN) jumped as much as 2.5% before slipping. Mega-super discounter giantWal-MartStores Inc. (NYSE: WMT), gained all week and looked poised to climb toward the top of its dreary 10-year range before Friday, when it flipped over.

In short, data shows consumers were not missing in action at the malls this year as the labor market heals and wages rise. A recent analysis by Deutsche Bank AG (NYSE: DB) show states' withholding tax receipts are rising -- a clear indication of improved employment and incomes. The recovery is here and it's real. Remember how the conventional wisdom as recently as the summer held that newly frugal consumers were tapped out and would leave nothing but coal in retailers' cash boxes during this holiday season? Wrong. Never, ever count out the American shopper when the chips are down.

Critical Change in Fed Policy
Bank stocks were laggards all week, slipping 1%. The catalyst appears to be the release of details by the Federal Reserve on how it plans to pay interest to banks that park cash in its vaults via offer "term deposits," which are the equivalent of an instrument that retail investors know as certificates of deposit.

At first blush, this may seem like good news. Extra interest means extra revenue for the financial sector. But it's actually a clever ruse: Another step by Fed chair Ben Bernanke to edge toward an exit from programs providing unprecedented, experimental financial support of banks over the past year.

By offering term deposits, the Fed will reduce the amount of cash in the financial system. Currently, banks are holding some $1.1 trillion in "excess reserves" -- extra money that they aren't required to hold for regulatory purposes. The fear is that once the economic recovery gets going, a lot of this money will find its way into the real economy, resulting in increased inflation.

It is widely believed that well before the first official interest rate increase, we will see a number of exit strategies adopted that will act as de-facto rate hikes. Term deposits will be one tactic. Another is an obscure instrument known as reverse repurchase agreements or "reverse repos," which let the Fed loan out Treasury debt for a period in exchange for cash.

The week ahead
Monday:The latest ISM Manufacturing Index is expected to come in between 52 and 55.5. Any reading over 50 represents an expansion in activity.

Tuesday:Unit domestic motor vehicle sales for December will be reported. The consensus expects 8.4 million vehicles to be sold -- up from 8.2 million in November and 7.9 million in October. Also, November factory orders will be released. Both these data series have shown upside surprises in recent months.

Wednesday:The ADP Employment Report offers a preview of Friday's big employment report from the government. It's been consistently more negative on job losses than the government report, leading to declines on its release that have been reversed two days later when the federal jobless figures are released. Also, the minutes from the last Federal Reserve meeting will be released. And the ISM Non-manufacturing Index will provide an update on the services sector.

Thursday:Chain store sales will provide a glimpse of how retailers performed during the holiday shopping season -- providing a gauge on consumer health. Also, weekly jobless claims. Both of these are likely to be seen as positives.

Friday:The government provides an update on the job market. Wall Street expects payrolls to be unchanged between November and December. Unemployment rate should remain at 10%. I'm looking for a small upside surprise. (The author is Contributing Editor, Money Morning)

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