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What a difference a day makes. Things were going fine through the first four days of last week; the big pullback from two weeks ago had nearly been undone. Then Friday struck, and undid almost all of the gain for the week.

The contraction, however, isn't even the point - the market sill managed to leave the week with a small gain. That part about last week that should trouble the bulls is how the rapid (and largely unexpected) pullback is apt to inspire a lot of doubt about the market's health . When pessimism is prevalent, stocks (NYSEARCA:DIA) (NASDAQ:QQQ) (NYSEARCA:IWM) have an easy time heading lower, and a hard time heading higher.

We'll explain more in a moment, right after a quick review of last week's economic numbers.

Economic Calendar

All things considered, last week was actually more good than bad on the economic front, leaving one to wonder exactly what was so bad - aside from disappointing Q3 results from Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) - that it merited a 1.7% selloff on Friday.

Retail sales, for instance, grew 1.1% with or without cars last month, easily exceeding expectations for a 0.7% increase (or a 0.6% increase excluding automobiles). Capacity utilization and industrial productivity were up to, by 0.4% and to 78.3%, respectively. Even the modest increase is a step in the right direction following August's contraction. It's still wrong to say both pieces of economic data are "good", but at least they're not bad.

Capacity Utilization and Industrial Productivity
(click to enlarge)

The big news from last week was more good news on the real estate front. Housing starts jumped from 758K to 872K (annualized rates), and building permits ramped up from 801K to 894K (also annualized). That's a multi-year high reading for both sets of numbers, and extends what's becoming a very persistent trend. Check out charts of each below.

Housing Starts & Building Permits
(click to enlarge)

The only real red flag was the surge in new unemployment claims. Last week's 388,000 initial claims was well above the reading of 342,000 (continuing claims didn't move much). Yet, bluntly, the figure is something of a non-factor anymore…it's been in the upper half of the 300Ks for over a year, and we've seen unemployment rise and fall all over the place since then. Nobody really cares anymore, because claims tell us little about the actual health of the economy.

Point being, though Google and Microsoft started the selling avalanche, their results were the only thing that actually merited a dip. Could it be that traders are simply ready to start a profit-taking wave, with no specific (meaningful) prompt? If so, that may be the scariest prospect of all.

The rest of the details are on the table.

Economic Calendar

The coming week will be even less eventful, in terms of economic numbers. The only one we're really interested in as a potential market-mover is Friday's preliminary GDP reading. The pros expect a 2.0% increase in economic activity, up from Q2′s 1.6% increase. Thursday durable orders figures may be worth watching as well.

Stock Market

A little bad earnings news pulled the rug out from underneath the market in a hurry on Friday, turning a 2.0% gain for the week into only a 0.3% gain for the week. Worse (and as was noted above), the drastic size of the dip may have convinced the majority of traders that the tide has been turned too far to stop a pullback now. Now, the S&P 500 (SPX) (NYSEARCA:SPY) has made two lower highs, and is currently en route to a second lower low.

That's not the only new read flag, however. For the first time since April, the CBOE Volatility Index's (VIX) (NYSEARCA:VXX) key moving averages have made an upward crossover, suggesting the VIX is actually in a new uptrend; the bowl-shaped reversal effort that's taken shape since August is also firming up.

More than that, this is the second high-volume selloff the S&P 500 has made in the last couple of weeks. Check out the volume-bar pattern since early October. The dip from two weeks ago was on rising volume, and the subsequent rebound was on light (and fading volume). Then the dip late last week was on strong volume again? One or two high-volume selling days can be dismissed as chance, but we're seeing a lot of high-volume bearish days now, without any high-volume bullish days. That bodes for more selling pressure.

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

You'll also notice the S&P 500 closed just a tad under its 50-day moving average line. Just for the record, not every major index actually closed under the 50-day line, and odds are good that we'll see at least something of a dead-cat bounce early this week. Just don't jump to any conclusions. The S&P 500 still has some big-time resistance at 1463 (last week's highs, and the upper 20-day Bollinger band), and the 20-day moving average line is still sloped downward.

Just for good measure, here's a look at the weekly chart of the S&P 500. It doesn't tell us anything new, though it does put into perspective just how overbought and vulnerable the market is after the June-September runup. The recent bump into the upper Bollinger bands prompted a near-perfect pullback once they were reached, though the bearish pressure has hardly been fully burned off yet.

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

Q3 Earnings

Though far from over, about 25% of the S&P 500′s companies have reported last quarter's numbers. And so far, earnings have been about as bad as expected. The S&P 500′s overall income for the names that have reported is off by about 1.7% on a year-over-year basis. That puts the S&P 500′s EPS on pace to reach $24.86 for Q3, which is pretty much on target with what the pros were thinking before earnings season started.

As for sectors, the technology (NYSEARCA:XLK) and industrial (NYSEARCA:XLI) sectors have posted the biggest declines in their bottom lines. On the flipside, consumer staples (NYSEARCA:XLY) and financial stocks (NYSEARCA:XLF) have posted fairly respectable earnings improvements. Those two sectors have also doled out the strongest number of companies that have topped expectations.

It's all on the grid below.

S&P 500 Third Quarter Earnings, by Sector
(click to enlarge)

Source: Weekly Market Outlook - Inside The Pullback

Additional disclosure: BigTrends Rapid Options Income clients are in an SPY Condor Options position.