After an impressive four-week jaunt to the upside, stocks finally encountered some profit-taking last week. And although the bears certainly had their share of opportunities given the weaker-than-expected data on the consumer front, our friends in fur weren’t terribly successful in their efforts. In fact, it took a decline on Friday to knock the Dow, S&P, and the Russell 2000 back from the new cycle-highs set on Thursday. The bottom line is the S&P fell -0.63% on the week while the Dow dropped -0.52% and the NASDAQ declined -0.74%.

With just about everyone and their grandmother screaming about the market’s overbought condition and opining that the market must pull back now for any variety of reasons, it is interesting that the bears were unable to get something going by the end of the week. However, should the glass-is-half-empty crowd find a way to breach the 990 mark, we’re guessing that the technicians will jump on the bandwagon and stocks might see another corrective phase. Much of the focus this week was on the not-so encouraging data on the consumer front. While we apologize for the dryness of the economic data that we are about to present, this market continues to be all about the data. Positive reports on all things economic help to cement the idea that the economy is on the mend and that stocks can continue to run, while less-than optimistic data causes doubt to creep in.

So, with the caveat that non-econ geeks may want to skip ahead; first, there was the -0.1% decline in July retail sales, which fell far short of the expectations for an increase of +0.8%. Even the 2.4% gain in auto sales disappointed given the 15% increase in July. In addition, the bulk of the discretionary categories (furniture, electronics, building materials and dept. stores) also saw fairly significant declines last month. In addition, the University of Michigan Index of Consumer Sentiment fell to 63.2 in August versus expectations for a reading of 69 and the 66 level seen in July. Unfortunately, this the lowest level since stocks bottomed back in March. Finally, the current conditions component fell to 64.9 from 70.5 last month, while expectations fell to 62.1 from 63.2.

There was also some discussion about market valuations last week. Although it is amusing that the research shops always seem to suddenly become valuation watchdogs AFTER a bear market smack down, Bespoke noted that the S&P's P/E (price-to-earnings) ratio reached its highest level since the end of 2004 this week. While this sound bad, it is worth noting that P/E’s always tend to look high as recessions come to an end because earnings have usually taken quite a hit. So, as the stock market moves higher in anticipation of better times ahead, P/E’s always begin to look “too high.” But, once the earnings start to pick up, this condition usually is alleviated.

The banks were also a source of contention during the past week. The group overcame cautious comments from Rochdale analyst Dick Bove, who suggested taking profits in the sector on the notion that the recent rally has not been driven by a change in the near-term earnings outlook, but rather by a shift in investor psychology. In addition, Bloomberg reported that 150 public US banks have toxic assets of 5% or more on their books, a level that could cause them to ultimately fail.

But the banks rebounded into the end of the week as the disclosure that hedge fund Paulson & Co. had taken large stakes in Regions Financial ( ) +14.4% and Bank of America ( ) +5.9% was definitely a bright spot. The thinking here is if the REALLY big boys were buying banks in July, well…

In closing, stocks are certainly “set up” for some sort of a pullback and we would not be surprised to see another run-of-the-mill corrective phase. Traders could cite economic data or a correction in China as the cause and as we mentioned, a break below 990 would certainly bring in some technical selling. However our research shows that unless something changes on the fundamental front, we should continue to view a pullback at this point in the game as a buying opportunity for the next couple of weeks. But after that, let’s all keep in mind that September is on the horizon.