NEW YORK (

TheStreet

) -- Small-cap stocks were participating in the market rally Tuesday, with the Russell 2000 Index up 0.6% in afternoon trading. Small-caps outperformed the market in 2010, as merger activity and faster profits drove stock prices higher.

Industrial plastic films producer

Fuwei Films

(FFHL) - Get Fuwei Films (Holdings) Co., Ltd. Report

was the biggest gainer among small-caps on Tuesday, shooting up 28% to $4.15. The stock is up 66% over the past month. In September, the company settled a shareholder lawsuit that alleged promoters hyped the company's IPO in 2006 even as Chinese authorities were investigating three of its executives for illegally taking over control of the company.

The sharp appreciation in the stock in the last few months appears to have baffled even the company's management. In a press release on December 23, the company noted the stock's unusual price rise.

"We really appreciate our investors' continued interest and support of Fuwei Films," said Mr. Xiaoan He, CEO of Fuwei Films, "and while we are not currently aware of any information which we have failed to disclose, among the reasons that might have caused the recent rise in our market price other than the settlement of the class action litigation and the earnings release of the third quarter of 2010, we will continue to keep our investors informed."

IP services company

Interactive Intelligence

(ININ)

was soaring 24% to $36.35 after it issued a fourth-quarter outlook that was higher than forecast. The company now expects an adjusted profit of 48 cents to 52 cents for the fourth quarter against a consensus estimate of 31 cents.

Small-cap energy stocks were seeing momentum with

Evergreen Energy

(EEE)

,

Cred Petroleum

(CRED)

,

Sulphco

(SUF)

and

Tri-Valley

(TIV)

among the big gainer on Tuesday's trading action.

Talbots

(TLB)

was the biggest loser in the small-cap space on Tuesday, dropping 17% to $6.30 after it issued a weak outlook for its fourth quarter results.

For the fourth quarter ending January 29, the retailer expects same-store sales to drop 6% and an adjusted loss of 15 to 19 cents, higher than an earlier forecast of a 5 cent loss to 3 cent profit.

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Israel-based

Click Software

(CKSW)

was another stock that plunged on a weak fourth-quarter outlook. The company said after the bell Monday that a higher head count and a write-off will hurt its fourth quarter profit and cut its quarterly sales view. The company's forecast for sales of about $18 million fell short of analysts' estimates of $20 million, according to

Thomson Reuters

. Shares were sinking 15% to $7.91.

Other small-caps that topped the loser's list Tuesday morning included

Premier Exhibition

(PRXI)

,

Tuesday Morning

(TUES) - Get Tuesday Morning Corporation Report

,

Brooklyn Federal Bancorp

(BFSB)

and

ZBB Energy

(ZBB)

, with their stocks shedding between 14% and 17% of their value.

--Written by Shanthi Bharatwaj in New York

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Shanthi Bharatwaj

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.