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Another week, another record high. Nothing new there, though at this point the market's gotten uncomfortably overbought.

The rationale side of your brain says that's a reason to sell… or at least stop buying. Yet, the instinct to want to jump onto this rising rocket also makes sense - this may well be the beginning of a rarely-seen true melt-up. They always end badly, but what a ride they take you on while they're in motion.

Which one are we seeing right now? We'll talk about that in a moment. First, let's slice and dice some recent economic data.

Economic Calendar

Whew! What a jam-packed week of economic data. There's too much to look at each individual piece of information, so let's just stick with the highlights.

First and foremost, not only are consumers feeling less and less inflation, they're getting dangerously close to deflation. As of April, the annualized inflation rate stands at 1.06% - the lowest reading we've seen since we came out of the recession, and it's clearly in a downtrend. The inflation that producers (factories, plants, assemblers, etc.) are experiencing is an even lighter rate of 0.6% as of last month. While low inflation feels beneficial for the economy on the surface, in reality, it reflects weak pricing power, and that's a sign of weakness.

S&P 500 Versus Inflation
(click to enlarge)

Housing starts and building permits were a mixed bag. Not only did starts fail to reach an expected pace of 970,000, but fell all the way to 853,000 from March's 1,021,000. That's the red flag. Yet, builders are ramping up their work. Issued building permits rose to 1,017,000, from 890,000, topping estimates of 950,000. Though the pace of overall growth is slowing, generally speaking, we're still seeing growth here.

Housing Starts and Permits
(click to enlarge)

On the industrial production front we saw a duo of potential problems. Production fell 0.5%, while capacity utilization fell from 78.3% to 77.8%. While one bad month doesn't start a long-term downtrend, all big trends start as small ones. Considering how important this data is for the market's long-term direction, both economic data sets will be under close scrutiny next month for possible further deterioration.

Industrial Production and Capacity Utilization
(click to enlarge)

And of course, retail sales were weak. Consumer spending only grew 0.1% with autos, and actually fell 0.1% when taking cars out of the calculation. That was better than expected, but it was also the second consecutive dip in retail spending. Between poor retail numbers and more than a handful of other disappointing economic numbers, last week scored as a bad one for the economy.

Economic Calendar

Will the coming week be any better? As you can see on the calendar above, there's not a lot of economic news in the lineup that will provide a boost, even if that news is good.

It will be a particularly telling week for real estate (again). Following last week's mixed message on the starts and permits front, investors may already be feeling uneasy. If they don't get the expected good news about existing homes sales (projected to grow from a pace of 4.92 million to 4.98 million) and new home sales (projected to grow from a pace of 417,000 to 425,000). Both are trending upward in the bigger picture, but like building starts and permits, the pace of that growth may be starting to slow.

Existing and New Home Sales
(click to enlarge)

Stock Market

There's no need to be coy or clever here with our call; let's just tell you what you're wanting to know - we're expecting a pullback. We're not pulling that trigger yet though, knowing stocks have a way of doling out some surprising and strange results. In other words, as far as the market (NYSEARCA:DIA) (NASDAQ:QQQ) (NYSEARCA:IWM) has come just since mid-April (7%), there's a smidgen of a chance the move could motivate anyone who had been on the sidelines to pour in because they didn't want to miss any more upside. The problem with that thinking: the last 7% worth of gain we've made since mid-April may well be those stragglers who didn't want to miss out on any more upside. Prior to that, the S&P 500 (SPX) (NYSEARCA:SPY) had already rallied 14% without even minor slip-up. As of Friday, stocks have advanced 22% since November. That's a huge move…and an unusually large one to make without a decent correction.

Just to put things in perspective, let's first take a look at a weekly chart of the S&P 500. It's here we can see just how far we've come of late. It's here we can also see that - though it's strangely low - we've not yet seen the CBOE Volatility Index (VIX) (NYSEARCA:VXX) make a sharp move lower that would suggest confidence had become dangerously high.

S&P 500 & VIX- Weekly
(click to enlarge)

It's the daily chart that we need to keep close tabs on this week though, as it will give us the first and best signals of any pullback.

First and foremost, now that the S&P 500 has gotten comfortable above its upper 50-day Bollinger band, it may well find support there. This bolsters the bullish argument. The fact that volume is finally starting to rise on the way up also bolsters the bullish argument. The question is, will it be enough?

S&P 500 & VIX - Daily
(click to enlarge)

In spite of the bullish factors weighing in, there are more bearish forces at work. One of them is the fact that the S&P 500 is now 12.7% above its 200-day moving average line…a condition we've not seen since February of 2011, which resulted in a prolonged flat period, followed by an average-sized correction. We saw a 20% divergence from the 200-day moving average line in October of 2009, which also resulted in more than a little bearish volatility. Point being, we're currently at excessively-high levels.

The other red flag is the fact that the VIX - on the daily chart anyway - has reached a minor floor at its lower 20-day Bollinger band. This isn't as good of a bottom as the lower 50-day band line, currently at 10.8, but the lower 20-day band line has the potential to mark the bottom for the VIX and/or the top for the market.

So now what? We have to assume things will remain bullish until further notice, but we know exactly which red flags to look for that will mark the beginning of what should be a sizable correction: (1) a close back under the upper 50-day Bollinger band, and a VIX that's trending above its upper 20-day Bollinger band. If the VIX can start to trend above the upper 50-day Bollinger band, that would seal the deal, but the odds are the corrective move would be well underway by the time we saw that happen. We'll talk about a downside target when it starts to matter.

Source: Market Outlook - Stocks Ignore Shaky Economic Data