Is the stock market correct about the economy? Yesterday’s big rally suggests the American economy is resilient as Wal-Mart (NYSE-WMT) surprised analysts with a strong retail sales figure. Also confirming the primary trend of the market since late March is the Dow Jones Transportation Average – sitting at an all-time high this morning and up an impressive 20% this year.

But looking at the bigger picture, the market is still down 5% this year. Most stocks are struggling along with unimpressive trading volume and corporate earnings for the next six months are headed lower amid skyrocketing commodity prices. And Wal-Mart’s strong retail sales number defies the general trend in retailing in 2008; the big discounters like Wal-Mart are benefiting from a slowing/recessionary economy as consumers hunker down and hoard food and other essentials at wholesale prices. Apparel sales are horrible and other consumer durables or big ticket items are declining hard – namely auto sales.

This morning’s May payroll data was lousy as the unemployment rate surged to 5.5%. That’s not supportive of a long-term stock market rally and suggests yesterday’s rally was nothing more than a dead-cat bounce following five straight losing days.

But the #1 indicator I’m tracking that portends to more economic distress is housing. And the news here is absolutely dismal.

Mortgage delinquencies and forecloses continued to surpass record levels with 1 out of 10 homes in the United States now vacant. More people are foreclosing and leaving the keys to the house at the bank.

Household net wealth is also deflating. Americans’ household net wealth declined $1.7 trillion dollars in the first quarter – the largest quarterly drop since 2002. Over the last 12 months, households’ primary assets in housing, stocks and tax-exempt bonds are all under water. This paints an accelerating deflationary environment coupled by rising inflation in energy and food prices – the worst squeeze on domestic consumption since 1990 and, possibly, 1980-81.

Financing a home has now become much harder. It’s difficult to make a bullish case for new and existing home sales when banks are seriously curbing credit and 30-year mortgage rates at 6.09% have barely declined from 6.53% twelve months ago.

I’m sticking to my guns and remain underweighted in global stocks. I won’t fully participate in a big rally if I’m wrong about the economy and the markets. But the way I see it, I prefer to be on the safe side when most investors completely underestimate or don’t understand the sort of economic shock most consumers and companies are facing this year with oil prices north of $130 a barrel. Also, with banks still struggling, this market can’t make serious headway, either. Banks represent about 37% of total global stock market capitalization.

The market is a forward-looking tool. By the time the housing market bottoms, stocks will already have rallied. I’ll probably miss the initial rally. I don’t need to take unnecessary risks and have no problem foregoing the first 10% of any market rally. That’s been the case since mid-March when stocks “supposedly” bottomed. I think March 17 was not the market bottom, but instead, the beginning of a bear market rally after five straight months of losses for the indexes. Time will tell.

Have a good weekend.