There's obviously vertical movement somewhere which is only apparent when the engine is running. I'd say there are three places it could be:
- Big end bearings (but you've done them already)
- Little end bearings (seems unlikely you'd get 0.040" play and not be able to detect it by rocking the engine back and forth)
- Crank bearings - allowing the entire crankshaft/rod/piston assembly to move up & down. This would be harder to find due to the weight of everything, but should be fairly obvious, if you try to lift the engine up by the end of the crankshaft (if it's available, I don't know much about the SR engine). I'd also expect the engine to be jumping around all over the place, if it had that much vertical play...
It has to be movement between the physical components; if (for example) the rod were too long, it'd hit when you turned it by hand. Same with an over-tall piston, or an excessive stroke on the crankshaft.