The sharemarket broke a 10-day winning streak yesterday after the US Federal Reserve said the country's economy had paused recently. However, the Australian bond market found support after a wave of selling.
"Being the last day of the month there were some portfolio adjustments from funds that needed to sell equities after their big rally in January and buy bonds," Goldman Sachs institutional trader Richard Coppleson said.
But analysts were not expecting much of a pullback in the broader Australian sharemarket.
Morgan Stanley cited high dividend yields, positive leading macroeconomic indicators and a skew towards cyclical industries in its upgrading of Australia to overweight, from equalweight, in its quantitative model of 25 Asian and emerging markets. It expects cyclicals to outperform defensives this year.
"The current dynamic where people are missing out on equity-market gains is reflected in the orders lined up to buy strongly performing and high-yielding blue chips," said CMC Markets chief market strategist Michael McCarthy.
"This is not an aggressive buy into the growth scenario. It's almost a defensive bull market as people can see the writing on the wall for bonds and cash.
"We are seeing a return of investors who haven't looked at shares for a long time. We are also seeing a lot of short sellers get absolutely creamed."
Mr McCarthy expected the weight of money to support equities until the level of bonds and cash held by institutional and retail investors falls significantly.
The index could break major technical resistance and run towards 5300 in the next three months, he said.
The benchmark S&P/ASX 200 closed down 0.4 per cent at 4878.8 after hitting a fresh 21-month high of 4906.2 in early trading. That followed its longest winning streak since 2003. The index rose 4.9 per cent in January -- its biggest monthly gain since October 2011 and its strongest January since 1994.
BHP Billiton, Rio Tinto and Woodside Petroleum fell between 0.4 per cent and 1.5 per cent after materials and energy stocks led a 0.4 per cent fall in the US S&P 500 earlier yesterday.
Supermarkets operator Woolworths declined 1.3 per cent after reporting food and liquor sales at stores open for at least 12 months rose 2.5 per cent in its fiscal second quarter -- near the low end of market expectations.
Sleep-disorder treatment maker Resmed fell 7.7 per cent on the prospect of US government changes to reimbursements to medical-equipment suppliers.
Pharmaxis dived 46 per cent after a US Food and Drug Administration advisory committee did not recommend the company's respiratory-disorder drug Bronchitol be taken by cystic fibrosis patients.
BBY senior healthcare analyst Dennis Hulme said it could take another three years to receive FDA approval.