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The market’s switch to small caps?

According to The Australian Financial Review, the top 10 stocks that drove the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) prior to the market’s plunge in May accounted for an incredible 73.1% of the index’s 572.01 point gain. However, it seems that resources stocks and small caps have retaken some of the limelight, with the dominance of the top 10 drastically reduced since the market’s freshest run since late June.

The climb to May

Not surprisingly, the big four banks made up the top four contributors for the run to May 14 – the date at which the market started to turn south – as investors sought out defensive high-yielding plays. The top 10 were rounded off, in order, by Telstra (ASX: TLS), supermarket rivals Wesfarmers (ASX: WES) and Woolworths (ASX: WOW), QBE Insurance (ASX: QBE), CSL (ASX: CSL) and Macquarie Group (ASX: MQG).

The plunge (May to June)

During the market’s plunge between May and June, the top 10 stocks accounted for 55.3% of the sell-off, in which the benchmark index shed 565.03 points. Westpac (ASX: WBC) was the most sold stock in this period, whilst AMP (ASX: AMP) and Newcrest (ASX: NCM) were also heavily sold.

This implies that many investors chose to hold onto their blue-chip stocks even despite enormous losses.

The recovery

However, the dominance of the big players has dropped off in intensity with the market’s recovery. The top 10 are now only accountable for 66.6% of the index’s 495.14 points (since June 25), implying that the lower caps and resources stocks have gained in popularity with investors, and that these have helped to spruce up the index.

Interestingly, despite the market’s avoidance of mining stocks in the last two years, mining heavyweight BHP Billiton (ASX: BHP) has contributed the most index points since the index’s low. In fact, it has had a greater influence on the index since June than Commonwealth Bank (ASX: CBA) did in its climb to May.

Foolish takeaway

There has been much hype that small-cap stocks (driven by strong earnings and profit gains) could play a much bigger role in driving the index further. With the dominance of the top 10 seemingly tapering off, now could be the time to invest in small caps!

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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