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Markets remain overextended, but could push higher first.

The current state of euphoric conditions and some implications.

A summer correction still looms.

Last Friday morning, I wrote on SA that the market was approaching severely overbought levels. It only took until the next morning for me to post on my own blog that stocks were now severely overbought and to "expect consolidation at a minimum in the next few days."

The Dow's triple-digit loss yesterday was variously blamed on the World Bank lowering its forecast for global growth to 2.8%, for the U.S. to 2.1% (clearly the Bank's staff doesn't read enough of Wall Street forecasts), renewed tensions in Iraq, and House Majority leader Eric Cantor's primary loss to a tea party-style candidate, a result that could presage more hardline confrontation in Washington.

Those are all good reasons, but I am in the camp saying that the biggest reason was the short-term overextended nature of the market. There is always some bad news somewhere in the world, and when stocks are ripe to correct they will find it.

The market remains overextended notwithstanding Wednesday's red ink, but a likely-to-beat-consensus retail sales report for May due out Thursday morning could again fire up the motors (and mouths) of those insisting that the economy is going to accelerate the rest of the year. May brought the weather rebound that a cool April failed to deliver, so I do expect a good-sized rebound (auto sales were strong last month), but the more important number is the year-on-year comparison and in particular, the first five months' comparison. June does not rate to show the same kind of jump that May has, though many on the Street will extrapolate exactly that.

The Cantor loss will probably be quickly forgotten by markets, and the retail sales report should help the process. Against that is the fact that the retail report is the last big economic report from May, though industrial production and housing starts next week could give us more of the same flavor. Therein lies a danger to the rest of the month.

Should the reports noted above turn out to be favorable (meaning that they beat estimates, which is what the Street really cares about) and start pushing the S&P back towards its previous high or even above it, the Fed might be sorely tempted to throw a spanner into the works at next week's meeting. The central bank has recently floated some hints that members are getting worried about complacency in the stock market, so a combination of above-consensus results and new highs in the major indices could conceivably provoke the Fed into taking a shot or two, such as increasing the size of the taper or announcing that if the current data stands up, the bond-buying program could end in September.

A phenomenon you may have noticed of late is the tendency to use 1999-2000 as the benchmark for deciding whether conditions are bubble-like. Since we are manifestly not at 1999 levels, the conclusion - either implied or flatly asserted - is that euphoria and sentiment must therefore not be at dangerous levels either.

This is a serious mistake. If one tries to use the metrics of the greatest sentiment and valuation bubble in the history of the U.S. stock market as a benchmark, then there were never any other bubbles at all, including 1929. The urge to do so is understandable, both because it is more recent and therefore known to nearly all, and because no market in our lifetime is going to get that stupid again (though perhaps it may in the lifetime of my son, who is only 17).

But there is a great deal of euphoria about, make no mistake about it. The last peak was in 2007, though it began in 2006. Of the last two market peaks, only 1999 combined economic euphoria with investor euphoria and was truly national, in the manner of 1929. But investor euphoria periodically comes along without its economic counterpart, as it did in 2006-2007. There was also housing euphoria present in 2006, now being replaced by tech euphoria (again) this time around: Not as frothy as the dot-com era, true, but frothy nonetheless. Analysts and traders are back to obsessing on "disruptive" technologies again, investment money is pouring into private equity-stage financing rounds and HBO has even given the whole business its own TV show (Silicon Valley).

Trader euphoria has been rekindled in many quarters by last week's European Central Bank (ECB) basket of policy adjustments to try and take down the euro (so far a success) and maybe even push banks into lending a few extra bucks in the process. The net effect has been a renewed sense of conviction that central banks are backstopping equities, a sentiment that I am not sure is shared at the Fed. It's a sentiment that could come undone in a hurry, perhaps with a nudge from the central bank itself (something many traders believe to be unthinkable, and so a more potent source of disruption).

So yes, there is stock market (and credit) euphoria of late, even if it isn't a national craze like the dot-com era. But sentiment is also is very much like Tobin's Q or the Shiller PE ratio: long-term measures that can persist at dangerous levels for long periods. The current euphoria may lend itself to occasional bouts of volatility, but I don't see it as a trigger for bear market-style price declines - more of a long-term condition that weakens the immune system over time.

Wednesday's pullback could turn out to be a favor to the bulls, because it pulled the markets just back out of the danger zone on a short-term technical basis. Yet I still see a correction as a base case for the stock market sometime this summer, even though there is no evidence yet that Wednesday's minor sell-off is the start of it. The impending FOMC statement should manage to keep equities from heading off too much in either direction, though it too could be followed by typical post-meeting weakness, especially in a below-average month like June. The strongest conviction I have is one diametrically opposed to what I was hearing from fund managers today: I would not put new money to work in current market conditions. I also fear the current low volume levels are at least temporarily amplifying the participatory, self-reinforcing effect of HFT trading. Those spirals have been upward in the last few weeks, but they can go in either direction.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.