Ideas, Inspirations, and Resources for a Monday

* Implications of Sector Rotation - A reader emailed me with the idea that the market was weak because the recent rise was accompanied by greater than normal sector rotation. That's intuitively appealing, but may not match historical precedent. I went back to 1990 and examined all five day periods in which the S&P 500 Index (SPY) was up more than 1% but not more than 2% (N = 792). This matches the five-day period that ended on Friday. I then split the sample in half based upon the five-day proportion of advancing stocks to declining stocks on the NYSE. The rationale was that a high degree of sector rotation should suggest greater balance among rising and declining stocks. If the rise is occurring across all sectors (i.e., without rotation), advancing stocks should dominate decliners. When we've risen in SPY and advancing stocks have strongly led declining issues, the next five days in SPY have averaged a loss of -.11% (192 up, 204 down). When we've had a similar rise in SPY and advancing stocks have been more in balance with declining issues, the next five days in SPY have averaged a gain of .13% (205 up, 191 down). This, of course, is not an exhaustive study of the topic, but it suggests that rotation may not be bearish for a rising market in the short run.

* Primary Bull Market? - David Korn, in his excellent newsletter, notes the implications of the view that we made a bear market low in August, 2006 and still remain in a primary bull market: "The implication that we are in a secular bull market is important because if you follow that belief then you should be expecting record all time new highs in the major indices BEFORE ANY BEAR MARKET ARRIVES. That would mean significant gains, even from these levels." I think there's merit to this view and will be tracking money flows carefully to look for support or disconfirmation of the idea.

* Trading Insights - Gap trading, the psychology of consecutive losses, and more link updates from Trader Mike.

* Stocks With Energy - Kirk, with an excellent observation on the value of stock screening.

* A Look at Management Integrity - A very interesting post from Research Recap identifies five stocks with particular risks related to accounting and governance.

* Themes - Thanks to readers for emails and comments on my recent post concerning theme-based trading. I see that over 400 traders are now subscribed to the Twitter posts that track themes each day. My hope is that those links help keep you posted on what traders and investors are looking at each day.

* Inflation Matters - Eddy Elfenbein posts a couple of excellent charts that show how we remain below the 2000 peak in the S&P 500 Index, when adjusted for inflation. While on the Eddy topic, here's his interview conducted by Tim Sykes.
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