World stocks have picked themselves up in the past two weeks and the US Federal Reserve?s Ben Bernanke helped them on their way on February 25 by studiously declining to stoke speculation about imminent rises in interest rates.

The sharp sell-off that started in January begins to look like a correction and nothing more. Continued gains in the oil price strengthen that contention.

Against this backdrop, it is interesting to note that the leadership of markets has shifted in 2010. That comes through clearly when looking at measures of momentum in different stock markets around the world.

In charts 1, 2 and 3, I have shown the performance of ETFs, which track the S&P 500 (SPY) and the MSCI Emerging Market Index (EEM). Chart 3 shows the relative strength of emerging markets versus the S&P 500. In the relative strength chart, a rising line indicates that emerging markets are outperforming the US, while a falling line indicates that the US is outperforming. Based on the performances of both ETFs over the last several years, investors have become conditioned to the theme that when equities are rising, emerging markets typically outperform the US. On the other side of the coin, during periods when equities are weak, US stocks have typically held up better than their emerging market peers. As seen on the relative strength chart, the only period where US stocks meaningfully outperformed emerging markets was during the credit crisis (red line in all the three charts).

The existence of this long-term trend makes recent developments all the more interesting. Since the recent lows in early February, equity markets around the world have all recovered to some degree. However, unlike prior rebounds, emerging markets have been underperforming. In fact, while the major US averages (S&P 500, DJIA, and Nasdaq) closed above their 50-day averages on Monday, March 1, all four Bric countries (Brazil, Russia, India, and China) had yet to achieve that milestone.

Within the developed markets, the US is now significantly outperforming the rest of the world?an artifact of the strength of the dollar, which in turn owes much to the concern that the Greek fiscal crisis has generated in Europe.

It was the emerging markets, led by China, that set the pace of the rebound rally after the worst of the crisis. They are no longer providing that leadership and investors still appear nervous about them.

All other things being equal, the outlook for emerging markets, or at least the resource-related ones, appears positive given the favourable prospects for metal prices on the back of improving global industrial production and stronger global economic growth.

What is important is that the ratio of the Emerging Markets Index and World Index is also driven by commodity prices and, specifically, metal prices. The relative risk of investing in emerging-market equities has increased as the ratio has outrun metal prices.

For now, hopes seem to centre on the US. Given the tenor of the latest news from the US?with the housing market slowing once more after the government subsidies were removed, consumer confidence taking a dip, many small banks still in trouble and the central bank plainly of the opinion that exceptionally low rates will be needed for a while yet?this does not seem to be inspiring confidence.

An extraordinary period for stock investing

The past 10 years have been an anomaly for the US stock market, and we are currently in an ?extraordinary period? for stock investing. After spending 10 years in the wilderness, high-quality US large capitalisation stocks are cheap compared to bonds.

Names such as Merck trade at 12 times this year?s earnings and yield more than 10-year Treasuries. IBM has record earnings, trades at 12 times this year?s expected results, buys back shares every year, and has grown its dividend 25% per year over the past 5 years. Stocks have historically provided inflation protection that bonds cannot. Like Edgar Allan Poe?s famous short story The Purloined Letter, these values are hidden from plain sight.

In addition to large cap stocks, so-called low-quality recovery names are still quite attractive, with many of them trading below book value. Regional banks, for example, were among the worst stocks in an otherwise good year in 2009, but have begun 2010 strongly. Many of them have ample capital, will see loan and credit losses peak this year, yet trade below tangible book value and therefore with a negative deposit premium. This year should also see a merger boom, as corporate balance sheets are mostly flush with cash, and profits are again headed higher. Healthcare and tech are fertile hunting grounds as well.

Broadly, I think the names that trade at low valuations on traditional accounting factors such as low price-to-earnings, low price-to-book, and low price-to-cash flow will be the winners this year. Companies whose stock prices already discount mid-cycle earnings, as many materials and industrial cyclicals do, may fare less well. Industrial metals prices have had very large moves, as has oil?both appear to be well ahead of fundamentals. If the Chinese continue their tightening cycle faster than the markets currently anticipate, things could quickly unravel. It?s important to keep in mind that China is structurally short of oil, and higher prices are not its friend.

The US has been outperforming emerging markets recently. Where the various countries? ETFs are trading versus their 50-days shows a similar trend. The S&P 500 tracking SPY ETF is one of just 4 ETFs trading above its 50-day moving average. The only other countries? ETFs trading above their 50-days are those of Australia (EWA), Canada (EWC), and Mexico (EWW). All of North America is doing well. If we look at the various regional ETFs (Europe, Emerging Markets, Asia, etc), all of them are still trading below their 50-days.

Dollar carry trade may reverse in the short term

The dollar remains a wild card that could underpin a strong stock market if its new-found strength against the euro continues, as investors in Europe appear to be substantially underweight US equities. A euro at 1.25 to the dollar at the end of this year would not be a surprise, and it still would not be cheap.

The recent rise in the dollar and the unwinding of the dollar carry trade may have contributed to the outperformance of US stock markets over the last two months.

The dollar became the funding currency of choice as global asset markets recovered from their post-crisis lows from March last year. This was because ultra-low interest rates in the US encouraged carry trade investors to sell the dollar to finance the purchase of riskier, higher-yielding assets. The result was that between March 1 and the start of December, the dollar fell more than 17% on a trade-weighted basis. Since December, the US currency has risen more than 8% on a trade-weighted basis, last week touching an eight-month high.

First, China responded to an explosion of new bank loans in early January by allowing bill rates to rise and twice raising bank reserve requirements.

This sparked a wave of profit-taking on commodities and emerging market equities, which in turn required investors to buy back the financing currency, the dollar.

Second, Greece?s fiscal problems exploded and exposed a fissure in the foundation of the European Monetary Union, causing some to question the very existence of the euro. This has weighed on the single currency and helped spur the dollar higher.

Third, positioning figures from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, have shown speculators have reduced their bets against the dollar to go long on the currency and now have record short positions in the euro.

Fourth, emerging market equity funds have seen their first outflow for three months as fears over monetary policy tightening in China, Brazil and India have increased.

However, I believe predicting the end of the dollar as the world?s funding currency of choice may be premature since the dollar is unlikely to lose its status as a funding currency, despite the Federal Reserve?s decision to raise the discount rate. Besides, the first part of the dollar?s recovery seemed to be related to year-end position adjustment. Then forces emerged at the start of the year that have extended the dollar?s gains. The Fed has been at pains to point out that the move does not herald the start of a series of increases in US interest rates, which, according to the central bank are likely to be kept ?exceptionally low for an extended period?.

Concerns about sovereign risk issues in Europe and the surprise actions of other central banks have boosted the dollar over the past six weeks. The Reserve Bank of Australia failed to raise interest rates in February while the Bank of England announced its willingness to extend quantitative easing?these policy shifts have contributed to dollar strength.

But it would be too naive to extrapolate a view that the US will lead a global tightening cycle, which will transform the dollar from a funding to an investment currency, and therefore deliver a year-long greenback and Dow Jones rally that outperforms the rest of the world.

The author is a Wharton Business School MBA and CEO Global Money Investor