Yesterday, I reminded you that we're most apt as traders to make errors in judgment when emotions are running high. The timing of that topic was no accident.  Stocks have been on a roller coaster the last two months, moving much higher in May, then giving us a major pullback late last week. Aside from the volatility that may have meant for your portfolio, the risk to your sanity was even greater. The market has just been range-bound for months. No more, and no less. If you've been waiting for a big move, then you've been waiting a long time, and are probably getting a little frustrated. The point was (and is today) to be sure to take a step back and assess for yourself what's really going on. The media is good at convincing you of things that may not exactly be true.

One of your actual clues should be volume. The selling volume was strong last Thursday and Friday, but there was little to no follow-through on Monday. So already, the alleged 'trouble' the market is in has tapered off. Will we see higher volume selling today? Maybe. Maybe not. Today, we'd like to look at another 'real' clue of any impending doom. We're going to look for a shift into the more defensive sectors, and out of the more aggressive ones. If we actually see a shift like that, the bears will at least have a little stronger case.

So what are we really talking about? It's actually a rather subjective idea. If the market is going to be bullish, investors and traders have to think aggressively. When that's the case, they'll be buying aggressive sectors like technology and biotech, and also buying growth areas like cyclical goods, transportation, basic materials, and capital goods. These are the stocks that "lead" a bull trend. Conversely, the laggards in a bull trend will be the sectors that have the least to gain (relatively speaking) in a bull market. These sectors include utilities, consumer goods (staples) and certain kinds of healthcare stocks, since many healthcare industries are don't have any competitive advantage in a growing economy.

On the other hand, when we see the market scrambling for "safe" stocks, odds are that a downtrend is on the way. In a weak market, investors shed their aggressive stocks and start buying names that are mostly shielded from bear trends ("defensive" stocks). These include consumer staples (people always need food), most healthcare stocks (people always need that too), and energy/oil stocks, which most folks use as a hedge against a troubled market.

The question is, then, have we seen such a rotation recently? The answer is.....yes and no. Let's take a look at the leading and lagging industries over the last three months, and then zoom in on the leaders/laggards for the last one month.

For the last three months, we're getting very mixed signals. The internet stocks have led, which is very aggressive to say the least. But then, water utilities and real estate dominated the leader board. That's a rather significant push into some defensive areas (although we still feel real estate is more of a danger than an opportunity right now). The biggest losers are the materials and computer services. Again, that's a significant shift out of stocks that should typically lead a bull trend.....could they be leading a bear trend?

Leading/Lagging Industries - three month

Is there anything new showing up recently on the one month chart? Yes. The energy stocks are clearly falling into favor, so we're starting to see - at least to a small degree - that flee to defensive stocks; the crude oil rally helped as well. The only non-energy industry in the top five over the last month is precious metals, which is most likely due to the rebound in gold. See, gold is also often used as a hedge against a bear market. That's not exactly a great choice, since gold is actually a hedge against inflation. However, that doesn't change the tendency of investors. As for the laggards here, the transportation sector is almost frighteningly weak. The steel stocks are lagging too. This doesn't exactly signal a lot of bullish enthusiasm for the coming weeks or months. The market is scaling out of growth areas and piling into more reliable holdings.

Leading/Lagging Industries - one month

So is this bearish then? Well, not quite yet. The market is certainly acting a little funny for a bull market, so being concerned about this rotation would be totally justified. There are a couple of things that need to happen elsewhere, though, before we'd say things are headed south. Be sure to keep any eye on where the strength and weakness is over the next few days. And as Bob mentioned on Monday, keep an eye on volume too. The one thing you may want to ignore is a lot of the TV babble.....they're selling commercials instead of good (i.e. helpful) data.

Price Headley is the founder and chief analyst of BigTrends.com.