The U.S. stock market almost stretched its rebound through a second straight week, but evidence of stalling job creation and quieter factories tested buyers’ resolve, and challenged the assumption that economic momentum will pick up anew in the fall.

Stocks began September under renewed selling pressure when a key manufacturing index shrank to 50.6 in August from 50.9 in July. A reading above 50 still points to expansion, and was far better than the contraction economists were expecting. But the wilting momentum was a cause for concern, and the expanding roster of contracting industrial sectors now includes those in Australia, Brazil, China, France, Italy, Korea, Russia, Spain, Taiwan and the U.K., while Germany and U.S. are approaching stall speed. Then on Friday, the U.S. Labor Department said job growth in August has slowed to nil for the first time in nearly a year, while the unemployment rate was stuck at 9.1%.

Lately, bulls have made much of the divergence between economic cues and sentiment readings: While the data show economic expansion slowing, consumer and business sentiment measures are far more dire and have plunged to depths typically seen in recessions. The implication is that Americans have overreacted to this summer’s U.S. debt-ceiling squabble and European debt crisis, and the panic surely will pass once we see the economy clawing its way back from the abyss. What this overlooks, however, is how crowd sentiment can shape behavior, persuading corporations to put off hiring and consumers to hold off big purchases.

So has the stock market sufficiently considered any economic deterioration still to come? At their lowest point this summer, when the Standard & Poor’s 500 Index closed at 1119 on Aug. 8, stocks were off 18% from their 2011 peaks—roughly two-thirds of the way toward the average peak-to-trough slide of 26% seen near recessions. All 500 of the components in the index fell that day, and declining traffic was a whopping 589 times heavier than the trickle of advancers. Ned Davis Research also counted five days in August when the horde of decliners was at least 10 times greater than advancers, and another five days when the exact opposite happened, a sure sign the market is groping for a bottom.

But while stocks have rebounded 5% from that low-water mark, momentum isn’t yet on the bulls’ side, and the S&P 500 is nearly 6% below its downward-sloping 50-day average. Bespoke Investment Group also analyzed stocks’ latest pop, between Aug. 22 to Aug. 31, and the results were hardly encouraging. While the average stock jumped 9.9% during that stretch, the 50 smallest stocks in the S&P 500 gained 12.7%, while the 50 biggest rose just 7.9%. In fact, that rebound was largely egged on by stocks with the richest price-to-earnings valuations, the lowest dividend yields, the most short interest. It’s a picture of a reflexive bounce following rabid selling, and not of longer-term investors stepping in to buy quality stocks.

It helps consumers that Treasury yields have plummeted this year, which keeps mortgage rates and borrowing costs down. Gas prices have pulled back despite the summer driving season, and crude oil is down 24% from its April high. Individual investors are soured toward stocks, and have whittled down their holdings, and dismal job growth has increased the cry for monetary support when the Federal Reserve meets later this month.
 
Meanwhile, money managers have suffered through a cranky summer. According to JPMorgan strategist Thomas Lee, the crop of funds lagging their benchmarks by at least 2.5 percentage points has ballooned from 24% a month ago to about 47%, the worst underperformance since 1998. Those trailing their benchmarks by at least five percentage points have also jumped, from 10% to 25%. Whether this is good news will depend on your perspective: Performance chasing by money managers who can’t afford to miss any rallies might help lift the indexes. But is it buying borne of true conviction, and will rebounding stocks really signal a mending economy?

The Dow Jones Industrial Average absorbed its fifth loss in six weeks, and gave up 44, or 0.4%, to 11,240. The Nasdaq Composite Index eked out a half-point gain to reach 2480, while the Russell 2000 fell 8 points, or 1.2%, to 683. Gold notched its eighth gain in nine weeks, while the 10-year Treasury yield fell below 2% (Source: Barrons Online).