Why This Market is Likely to Continue Higher Economic cycles are working efficiently with solid group rotation

Yesterday financial stocks stepped up to the plate again, and with a late-inning rally they managed to overcome much of Monday’s losses. Conspicuous among the winners was Bank of America (NYSE:BAC), which rose 4% to $8.02.

Nine of the S&P 500’s 10 sectors gained ground following the year’s first triple-digit decline of the Dow. The catalyst for the recovery was the revision of several government reports that turned out slightly better than when originally released. And European markets bounced early in the day as optimism grew that the Greece debt swap will go as planned.

At the close, the Dow Jones Industrial Average was up 78 points to 12,837, the S&P 500 rose 9 points to 1,353, and the Nasdaq gained 25 points at 2,936. The Big Board traded 800 million shares, and the Nasdaq crossed 444 million. Advancers overpowered decliners on the NYSE by 3.7-to-1 and by 2.9-to-1 on the Nasdaq.

In my Daily Market Outlook, I’ve noted several times that group rotation has been excellent and encourages us to believe that the indices will continue their plodding advance. The meaning of the term “group rotation” is that some industries and sectors will perform better than others at different times.

Since the market’s break from the confines of S&P 1,100 to around 1,225, all of the indices appear to be in a straight line up. But day after day, we see that the differences in the market’s breadth are relatively small.

For example, yesterday, on the NYSE, there were 2,436 stocks up and 651 down. A broad-based move like the present one is an indication that the economic cycles are working efficiently with some industries doing well in one period followed by others doing better later.

The two major industry groups driving the current run from the dregs of autumn have been the technology and financial stocks. But on days of profit-taking, the more defensive groups, like utilities, pharmaceuticals and income-oriented investments, have taken up the slack.

Conclusion: Group rotation is an important ingredient if stocks are to continue to move higher. So far, the rotation in this market should be scored an A+, and so is its potential for much higher prices