LIKE A COMPROMISE, THE STOCK MARKET'S first loss in five weeks offered some vindication to both bull and bear camps but left neither satisfied.

To watchful bears, a negligible 0.6% pullback after stocks had rebounded 50% in five months was hardly cause for celebration, and may even be cause for concern. The rally's flagging momentum, on the other hand, offers no comfort to bulls — not when the consensus is expecting a fuller correction and seems willing to wait before buying again.

The Dow Jones Industrial Average snapped a four-week winning streak to close down 49 on the week, or 0.5%, to 9321. The Nasdaq Composite Index gave up 15, or 0.7%, to 1,986, while the Russell 2000 lost 9, or 1.5%, to 564.

Economic data did little to break the stalemate. Retail sales stagnated in July, and unemployment claims ticked up sufficiently to dash — or at least delay — hopes of a swift rebound, but stronger-than-expected growth in Europe reinforces the perception that the global recession is ending. Consumer prices also held steady in July, alleviating pressure on the government to begin raising interest rates to fight inflation.

Traders handicapping the market made much of two developments: Insider selling picked up in sectors such as consumer staples, energy, technology and materials, which suggests that "in the eyes of corporate management, valuations are becoming stretched at current levels," says Patrick Neal, Jefferies' head of U.S. equity strategy.

Short interest also fell recently to 14 billion shares after peaking nearly a year ago at 18.6 billion shares. The scramble to buy back stocks to cover short bets has been a powerful driver of recent rallies, so the shrinking of this catalyst has worried bulls. Yet the pool of short bets is still bigger than that seen near the 2007 market peak, and JPMorgan's strategists reckon it will take another $91 billion of buying to shrink short interest to those levels.

Nonetheless, with the biggest gains possibly behind, some investors are paring their exposure as they wait for the correction. The market has factored in many "assumptions about the durability of the growth spurt we're seeing," says Mohamed El-Erian, co-chief investment officer at PIMCO. The market assumed, quite correctly, that fiscal and monetary stimuli will goose growth. But purchasing power is still fragile, and it remains to be seen if growth can be sustained in 2010.

EMULATING OUR GOVERNMENT, INVESTORS have taken to flinging good cash at clunkers. Freddie Mac 's (FRE) dubious common stock has jumped from $0.61 to $1.69 this month alone, while Fannie Mae 's (FNM) has nearly doubled to above $1. Even shares of Motors Liquidation (MTLQQ), a shell containing former General Motors assets being dismantled in bankruptcy court, have nearly tripled recently.

The lunge at Fannie and Freddie, both insolvent and placed in government conservatorship, was swelled by individual traders treating both like lottery tickets. With everyone scouring for signs of a housing rebound, Freddie Mac announced its first quarterly profit in two years. Net income of $768 million couldn't cover the $1.1 billion dividend it had to pay the government, but the resulting shortfall was still narrower than losses of $10 billion in the first quarter and $24 billion late last year.

The improvement, however, was cosmetic. By adopting a new accounting rule that relaxes recognition of losses, Freddie was able to write up its assets by roughly $5 billion. But the one-time boost is transient, and Keefe Bruyette & Woods analyst Bose George expects Freddie to go back to reporting losses in the billions next quarter. After all, the mortgage specialist saw serious delinquencies rise to 2.89% from 2.29% last quarter, and charge-offs and defaults continued to climb. Fannie Mae, too, saw serious delinquencies in its single-family portfolio rise to 3.94% from 3.15% in the first quarter and 1.36% a year ago (Source: Barrons Online).