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The script calls for a sell-off in stocks. So where is it?

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Many of the classic warning signs of an imminent pullback in stock prices are flashing red. Yet the market has continued to push ahead, seemingly oblivious.

The bears proffer the image of Wile E. Coyote, off the cliff but with his legs still in motion.

On Thursday, despite the government’s unarguably disappointing report showing a drop in July retail sales -- raising yet more questions about the consumer’s ability to spend -- major stock indexes posted modest gains to close at new 2009 highs.

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The Dow Jones industrial average added 36.58 points, or 0.4%, to 9,398.19, its highest close since Nov. 4.

Even if you believe that the rally since March 9 is a genuine new bull market rooted in expectations of an economic recovery, no such advance proceeds without sharp setbacks along the way. And we haven’t had one.

For the broader Standard & Poor’s 500 index, the most significant decline so far was a 7% drop from June 12 to July 10. Blink, and you missed it.

Since July 10, amid a flood of better-than-expected (i.e., less bad) second-quarter earnings reports, the S&P has jumped 15.2%, lifting its gain since March 9 to 49.7%.

Even many bulls now look around and worry this is all too much, too soon.

As I noted in this post on Monday, gauges of investor sentiment have moved quickly and solidly into bullish territory since mid-July. That’s often a good excuse for a bout of profit-taking.

The latest weekly Investors Intelligence survey of market newsletter writers showed 49.4% were bullish this week, up from 47.2% last week and the highest reading since January 2008.

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Another warning sign: ‘Short sellers’ who bet on falling stock prices have been scrambling to close out their trades.

Meanwhile, individual investors’ total purchases of domestic and foreign stock mutual funds swelled to $5.5 billion in the seven days ended Aug. 5, the highest since mid-May -- which was just as the market was tiring from its spring surge, although it never took a spill.

But maybe the most troubling clue is coming from China, where optimism about the economy -- and a speculative frenzy fueled by cheap money -- drove a 91% gain in the Shanghai market index from year’s end through Aug. 4. Since then the index has slumped in six of eight sessions, including today’s drop of 3%. It’s off 12.2% from the recent peak.

Fundamentally, Wall Street’s bulls still have a legitimate case: If the market is supposed to price in the future, rather than the present or the past, ‘It’s saying that the first half of 2010 is going to look a whole lot better than the first half of 2009,’ says Art Hogan, market analyst at Jefferies & Co. in Boston.

Between here and there, however, what are the odds of a pothole-free ride?

-- Tom Petruno

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