Highfliers stall as Wall Street rally falters

By Ellis Mnyandu - Analysis

NEW YORK (Reuters) - Investors are getting off the U.S. stock market's fastest horses, which paced stocks' headlong rally that began in early March, to switch to safer bets in an uncertain environment.

Companies in the financial, technology and industrial sectors initially drove the S&P 500 index's surge from 12-year lows. But in the past few days, the better performers have been in healthcare, consumer staples and energy.

Highfliers have been tech companies Apple Inc and Research In Motion, while an industrial standout was United Technologies Corp.

The more defensive choices coming into favor include drugmakers Pfizer Inc and Merck & Co soft drink company Coca-Cola Co.

Investors have long been predicting a speed bump after the rally in which the benchmark S&P rose 37 percent. But they are still optimistic that the market can achieve further gains, albeit at a slower pace than in the past two months.

KEEPING IN THE MARKET

"There's just more portfolio shifting," said Mike O'Rourke, chief market strategist at BTIG LLC, an institutional brokerage in New York.

"It could be a sign of people saying we've had a 37 percent rally. Let's just rotate into something that's a little less aggressive, keep the money in the market rather than go straight to cash."

The highfliers may have gotten ahead of themselves in the rally, considering the economy still faces major headwinds, so some investors are seeking defensive stocks as a safe haven while they wait for signs of improvement in the fundamentals.

Benefiting from sector rotation are pharmaceuticals, consumer staples and energy as crude oil prices approach $60 a barrel.

This week investors booked profits in technology, financials and industrials, causing the benchmark S&P 500 to break key technical support and dip below the psychologically important 900.

At Wednesday's close the S&P 500 was down 5 percent at 883 and capped a third straight day of losses, the longest since the onset of the rally.

Technology's performance has helped the Nasdaq Composite Index to outshine the S&P 500, catapulting the Nasdaq 39 percent higher since March 9.

Financials, technology, and industrials collectively accounted for 58 percent of the S&P 500 points gained since the bear market hit its low, according to JPMorgan.

"The early warning indicator of retracement is the rotation from the top three sectors," said Thomas Lee, JPMorgan's chief U.S. equity strategist.