NEW YORK ( TheStreet) -- The second quarter is officially off to a slow start, but the S&P 500's chart is still pretty solid, according to Mark Arbeter, chief technical strategist at S&P Capital IQ. "It is possible that we are finally seeing a pullback larger than a couple percent, but we think that once this drawdown is complete, higher highs will be seen by the major indices," he wrote in commentary released Thursday afternoon. With the major U.S. equity indices running up more than 25% from the early October lows though, there's is some nervousness building that they'll be at least a few days of trading screens being drenched in red before those "higher highs" arrive. For example, this week's sentiment survey from American Association of Individual Investors found the bull camp dipped below 40% for the first time since week ended Dec. 22. Additionally, retail investors pulled another $3.53 billion out of long-term mutual funds investing in domestic equities last week, according to the Investment Company Institute. J.P. Morgan weighed in on Thursday, saying the "setup" for stocks to move higher in the second quarter is less favorable than it was in first quarter with macro challenges in play for China and Europe and gasoline prices elevated. Overall, however, the firm still sees more positives than negatives, such as improvement in the employment picture, signs of the beginning of a recovery in housing, and strengthened bank capital positions. "Bulls and bears can cite a litany of arguments for their view," J.P. Morgan wrote. "But in our recent meetings, it seems most investors generally view this as a cyclical bull market, primarily fueled by easy monetary policy. And that 'relative' value is primarily viewed through the lens that bonds are 'overpriced' but stocks are not necessarily cheap." S&P Capital IQ's Arbeter has argued for the past few weeks that stocks did endure a kind of stealth pullback in the past two months, and that's a contributing factor to his optimism now. "Some of the earlier-in-the-year weakness can be plainly seen by looking at the price action of the DJ Transports, which fell 6% into its early March low," he wrote. "Since that time, the transports have recovered and appear to be tracing out a bullish base. To complete this bullish formation, we believe the index needs to break to new recovery highs above the 5,370 region."
He's also highlighted some interesting sector rotation action this week that should provide some clues as to when stocks may be ripe for another leg higher. "Sectors that have not pulled back like financials, consumer discretionary, and technology, interestingly took the brunt of the selling on Wednesday, and have had a tough time making any progress of late,"Arbeter said. "At the same time, transports performed rather well on a relative basis on Wednesday so it appears to us that this internal rotation is continuing." He continued: "The areas that remain weak, and got hit on Wednesday, were emerging markets, materials, energy, and precious metals. We think it will be important for these laggards to show some signs of basing action before we see another leg higher in the overall market." S&P Capital IQ has a year-end target of 1450 for the S&P 500, which closed Thursday at 1398, down 0.7% in the first holiday-shortened trading week of the calendar second quarter. J.P. Morgan, meanwhile, offered a novel angle on Apple's ( AAPL) tremendous appreciation this year, saying many fund managers now have what was termed an Apple problem. "Apple is 4.5% of the S&P 500, but it is even larger share of these other indices. Why does it matter?," the firm noted. "It is 18% of the Nasdaq 100 and more pertinently, it is 8% of the Russell 1000 Growth benchmark. Many fundshave individual stock constraints of 5%--meaning an individual stock can only be 5% of the portfolio, due to concentration concerns. Even if the weight in the benchmark is larger." As a result, J.P. Morgan theorized managers in this position likely "need to find other Apples to own" and cooked up a list of 15 companies that "possess qualities similar to Apple within their addressable markets." The firm used both qualitative criteria, such as customer loyalty, reputational excellence, and supply chain management, and quantitative standards, like hefty growth on both the top and bottom lines and under-ownership by institutions. Among the names making the cut were Qualcomm ( QCOM), LinkedIn ( LNKD), Broadcom ( BRCM), Intuit ( INTU), and Amazon ( AMZN). -- Written by Michael Baron in New York. >To contact the writer of this article, click here: Michael Baron.