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As Defensive Stocks Pause, Cyclicals Take the Lead

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In the S&P 500's march past 1,600, consumer stocks — both staples and discretionary — have been among the leaders. But as this bull market continues to run and the economy remains resilient, investors appear to be getting more comfortable owning cheaper cyclical sectors like industrials and energy.

"It's been an extraordinary start to the year," Dan Greenhaus, global strategist at BTIG, told CNBC. "Over the last 30 plus years, you've really only had three or four years start at a faster pace than we've seen this year."

With markets entering what is traditionally a seasonally slow period, BTIG's Greenhaus expects investors will find stock returns for the rest of the year muted. "But that said, coincident with Friday's number the stock market keeps going higher," he added.

(Read More: Warren Buffett: Stocks Will Go 'Far Higher' Over Time)

An Emerging Rotation

Reasonable valuations are one reason the market may continue to push higher. While the S&P 500 has reached new highs in its 13-percent surge this year, it is only trading on about 15.5 times 2013 earnings versus a historic norm of about 16 times.

Warren Buffett told CNBC that stocks are "reasonably priced" after being cheap a few years ago.

(Read More: Stocks Still Cheap? One Pro Says Yes)

But some areas of the market have become pricier than others. "It's just a portion of the market that's expensive," Sarah Ketterer, Causeway Capital Management CEO, said. "It's those expensive consumer staples and other supposed quality stocks."

Consumer stocks, both staples and discretionary, are up nearly 17 percent so far this year, supported by a rush into yielding stocks, resilient consumer spending and a recovering housing market. Only health care has done better — gaining 19 percent.

That has left cyclical industrials, energy and technology looking cheaper. And in the past month, these sectors have begun to outperform.

(Read More: What's Beyond the S&P 500's Relentless Rally)

"As the economy starts to pick up in reaction to all this stimulus and this anti-austerity that's sweeping the world now, those cyclical stocks will really get a second wind," said Anthony Chan of Chase Wealth Management.

But technical strategists at BofA Merrill Lynch only expect defensives to pause before leading the market again. "Many stocks in these sectors are liquid mega caps with higher yields and, given low bond yields, this is an area of the market that investors have favored," they wrote in a research note.

They see 1,700 as the next area of resistance for the S&P 500 — about 5 percent above current levels.

With questions growing about the impact of the payroll tax hikes and the sequester on consumer confidence, markets will get data on how the consumer is faring with the release of consumer credit data as well as earnings from Mondelez, Whole Foods and Molson Coors on Tuesday. Economists surveyed by Reuters forecast consumer credit to rise $16.00 billion in March after an $18.14 billion rise in February.

Media Buying

With few major economic indicators or earnings reports due out Tuesday to move the market one way or the other, investors are likely to focus on media stocks ahead of Disney's earnings after the close. The industry has done extremely well this year, with Disney and Time Warner shares up nearly 30 percent year-to-date.

(Read More: Netflix Is a Friend, Content Is Still King: CBS' Moonves)

Although a strong opening weekend box office from "Iron Man 3" won't be in Disney's fiscal second-quarter numbers, a few brokers raised their price targets on Monday. And last week, UBS upgraded Disney to "buy" from "neutral," on expectations that the media giant will generate above-average revenue and Ebitda (earnings before interest, taxes, depreciation and amortization) growth rates over the next three fiscal years.

Disney is expected to earn 77 cents per share on revenue of $10.5 billion for the latest quarter, according to estimates from Thomson Reuters.

(Read More: What to Expect from Disney's Earnings)

DirecTV and Discovery are among the other media companies reporting on Tuesday.

But don't expect Warren Buffett to invest in the industry.

"I just don't know if I look out 10 years, which of those (media) companies will be doing the best," he said. "It is an industry subject to a lot of change. It's much easier for me to predict that ketchup will be doing well or Coca-Cola will be doing well in 10 years."

By CNBC's Justin Menza. Follow him on Twitter @JustinMenza.

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