After impressive climb, U.S. stocks ready for an intermission

By Kate Gibson, MarketWatch

(MarketWatch) - After a near six-month ascent, the U.S. stock market is more than likely headed for a pause as investors waited for signals to continue a rally that many now view as overdone in light of the still-shaky economy. "We've had a great run here, but here's five reasons to be concerned going into the fall," said Art Hogan, chief market strategist, Jefferies & Co.:

September is historically the worst month of the year.
The market has had a significant run up from its March 9 lows, up about 50%. "On valuation alone we may be getting ahead of ourselves," said Hogan. Insider selling. "The significant increase in insider selling activity suggests that in the eyes of corporate management valuations are becoming stretched at current levels," the analyst said.

Short interest is winding down. "The lack of meaningful short positions for the most economically sensitive sectors eliminates a source of market support that was significant during the most recent rally," said Hogan. The consumer in general. "Unemployment is rising, the value of consumers' home continues to be languishing, and the consumer seems to have become a saver. The de-leveraging of the U.S. consumer is going to be a long process," said Hogan. 'The de-leveraging of the U.S. consumer is going to be a long process.'Art Hogan, Jefferies & Co.

Illustrating that concern, the Reuters/University of Michigan index of consumer sentiment released Friday fell to 63.2 in August from 66.0 in July. The drop was unexpected, with expectations calling instead for a rise to 68.5. Read Economic Report. The weak reading on consumer sentiment helped push stock indexes decisively lower on Friday, erasing weekly gains and halting a four-week winning streak.

The Dow Jones Industrial Average ($INDU) shed 76.79 points, or 0.8%, to finish the week at 9,321.4, leaving the blue chips down 0.5% for the week. The S&P 500 Index ($SPX) declined 8.63 points, or 0.9%, to 1,004.1, a 0.6% decline from the prior week's close, while the Nasdaq Composite (COMP) dropped 23.83 points, or 1.2%, to end at 1,985.52, a weekly loss of 0.7%.

False starts
The week began showing a high degree of resiliency. "The market refused to be concerned about any bad news," said Richard Hughes, co-president, Portfolio Management Consultants. But by week's end, the concept that less bad is good news was losing steam, with investors left with the "big question of how is the consumer going to fuel economic growth and expansion. It caused the market to take a step back, and think about where sustained growth is going to come from," said Hughes.

The consumer sentiment gauge and other recent economic data bolster the Federal Reserve's stance that economic activity is leveling off, yet the numbers don't paint a "definitive" rebound, said David Kelly, chief market strategist, JPMorgan Funds. "I think the numbers indicated that people are generally optimistic but at the same time very cautious about their own spending habits," said Hughes.

One day ahead of the soft consumer sentiment reading, retail sales for July came in worse than expected, prompting more than a few analysts to question whether the V-shaped recovery was turning into a U. The economic reports highlighted "the weakness of the broad economy and the narrow positive impact of the Cash for Clunkers program," said TJ Marta of Marta on the Markets LLC.

Incoming
"The week ahead may also be inconclusive on the pace of the recovery," offered Kelly. Economic data slated for release on Tuesday include the producer price index and housing starts, while investors on Thursday will mull initial jobless claims figures and the Index of Leading Economic Indicators. Friday's schedule includes data on existing home sales. "Housing starts may have risen due to increased multi-family activity but there is a danger that single-family starts fell in July, following four months of increases," said Kelly.

"Initial unemployment claims should fall below 500,000 within the next few weeks, but there is no indication that this will happen this week," he added.

And, while more than 90% of S&P 500 companies have reported results for the second quarter, a handful are still to come in the days ahead. On Monday, home-improvement retailer Lowe's Cos. (LOW) is expected to report its earnings, while discount retailer Target Corp. (TGT) and upscale retailer Saks Inc. (SKS) are slated to report on Tuesday. Barnes & Noble Inc. (BKS) and Sears Holding Corp. (SHLD) are among the companies slated to report earnings later in the week. "I am cautiously optimistic. At the end of the day, there has to be something that drives the top line of earnings growth, as companies are running out of ways to cut the bottom line," said Hughes.