The market’s smaller stocks have led the way during the snapback rally with small-cap exchange traded funds (ETFs) rising to new recovery highs.

Small-cap ETFs earlier this week fully erased the correction they suffered during March’s pullback. [Small-Cap ETFs Rally to 52-Week High.]

The ETF Review newsletter on Friday noted small-cap stocks have been outperforming blue chips recently and that the relationship is “particularly useful for gauging the ‘animal spirits’ of investors.” Investors Intelligence keeps tabs on the ratio between the Value Line Composite and the S&P 500.

“The ratio started to break down mid-March as bad news finally weighed on the market. However, the ratio has since recovered, reversed back up and broke out yesterday,” Investors Intelligence wrote in Friday’s ETF newsletter. “That reversal indicates the ‘risk-on’ trade is back on.”

The $17.6 billion small-cap iShares Russell 2000 Index Fund (NYSEArca: IWM) rose nearly 8% in the first quarter to outpace the S&P 500.

“The small caps have been providing leadership over the past few weeks and that is bullish for the market in general as it implies an offensive rotation,” Investors Intelligence said, adding the iShares Russell 2000 broke out Thursday to a new recovery high.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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