US Stocks: Are We Seeing a Rotation or Early Signs of Sizable Pullback？

This week, were looking for the battle to continue between tech-led growth stocks and cyclicals or companies that are usually affected by economic conditions.

“When the economy is roaring, they‘re roaring. When the economy is weakening, they’re weakening,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. “The economy will roar, at least for a period of time. Theres huge pent-up demand, whether just for travel or going back to work.”

Strong earnings, progress in vaccination rollouts and hopes of a $1.9 trillion federal coronavirus relief package is expected to continue to provide support, but some feel the equities face some headwinds.

Bank of America expects a more than 10% pullback in stocks, which are trading at more than 22 times 12-month forward earnings, the most expensive since the dot-com bubble of the late 1990s.

Some see a little time before the next sizable pullback. Peter Cardillo, chief market economist at Spartan Capital Securities in New York said, “What we saw (last week) represents a market that is tired and may not do very much. So we are headed for some sort of a pullback, but I don‘t think we’re there just yet.”

Last Weeks Recap

The major U.S. stock indexes finished mixed on Friday as investors continued their rotation by selling technology shares that have rallied through the pandemic and moving into cyclical stocks set to benefit from pent-up demand once the coronavirus pandemic is subdued.

Cash Market Performance

In the cash market on Friday, the benchmark S&P 500 Index settled at 3906.71, down 7.26 or -0.19%. The blue chip Dow Jones Industrial Average finished at 31494.32, up 0.98 or -0.00% and the technology-driven NASDAQ Composite Index closed at 13874.46, up 9.10 or +0.07%.

The Internals

Advancing issues outnumbered declining ones on the NYSE by a 1.87-to-1 ratio; on NASDAQ, a 2.14-to-1 ratio favored advancers.

The S&P 500 posted 51 new 52-week highs and no new lows; the NASDAQ Composite recorded 223 new highs and nine new lows.

Volume on U.S. exchanges was 13.47 billion shares.

Sectors and Stocks

Value stocks rose 0.6% while growth fell 0.6%. Industrials led rising sectors in the S&P 500, spurred by a 9.9% surge in Deere & Co and Caterpillars 5.0% gain to an all-time peak of $211.40 a share. Financials, materials and energy, along with industrials, rose more than 1%. The S&P 1500 airlines index jumped 3.5%, with post-pandemic travel in focus.

The stay-at-home winners, including Microsoft Corp, Facebook Inc, Alphabets Google and Netflix Inc, fell in a trend seen for most of the week. Amazon.com Inc also fell, as investors sold the leaders in the big rally since last March.

Applied Materials Inc was among the top boosts to both the NASDAQ and the S&P 500, rising 5.3% to $119.46, after it forecast second-quarter revenue above market expectations. Demand its semiconductor manufacturing tools has picked up during a global shortage of semiconductors.

Deere raised its 2021 earnings forecast. Deere reported profit more than doubled in the first quarter on rising demand for farm and construction machinery.

Economic News

On the economic front, data showed HIS Markits flash U.S. composite PMI, which tracks the manufacturing and services sectors, inched up to 58.8 in February.