It's hard out there for a bull.

Just when it seemed the stock market party was getting under way again

last week, the music scratched to a halt as investors got a rotten batch of data that showed a housing bubble pricked.

In the aftermath of the

Federal Reserve's

two-year campaign to raise interest rates by 425 basis points, which just paused (read: ended) earlier this month, the once red-hot housing market has gone cold. And while a slowdown has been a foregone conclusion on Wall Street for some time, the latest dropoff suggests a sharper correction than expected is at hand -- and the worst is yet to come.

"The message from the markets in response to these housing numbers is that we may not be headed towards a soft landing," says Hugh Johnson, chairman of Johnson Illington Advisors. "We may be headed for a hard landing, and if that's the case, then the stock market has further to go on the downside. Does this make me restive, uneasy and uncomfortable? The answer is yes, very much so."

For the week, the

Dow Jones Industrial Average

dropped 97 points, or 0.85%, and the

S&P 500

fell 7 points, or 0.55%. The

Nasdaq Composite

gave back 23.5 points, or 1.09%, over the five sessions, despite a modest gain on Friday.

The selloff picked up steam Wednesday when the National Association of Realtors reported that existing homes sold at a 6.33 million annual clip last month, the lowest level in 2 1/2 years and down 4.1% from June. Economists were expecting a more modest decrease.

The gloom resumed Thursday, when the Census Bureau reported sales of new single-family homes came in at a seasonally adjusted annual rate of 1.072 million, down from the revised rate of 1.12 million in June and a 22% drop from a year earlier. Compounding the disappointment, the seasonally adjusted estimate of new houses for sale at the end of July rose to the highest-ever level of 568,000, up from 566,000 at the end of June.

On Tuesday, luxury homebuilder

Toll Brothers

(TOL) - Get Report

reported a 19% decline in third-quarter profits. Toll also lowered its profit outlook for the year, citing a "continuing malaise" in the housing market.

"I don't see a turnaround in any of the markets," said CEO Robert Toll. "I don't see any forming a bottom."

Next Shoes to Drop

Thursday's report from the Census Bureau showed that median sales price of new houses sold in July was $230,000, flat with a year earlier. The data suggest that while real estate prices are no longer rising, they have yet to start falling, and some observers say that's the next shoe to drop. As inventory levels continue to rise, prices will ultimately have to fall to get things moving again, and that could be a long and painful process.

"We're getting very close to a point where prices decline and there's a race for the exits by speculators," says Johnson. "That's worrisome because of the impact it could have on consumer attitudes and spending."

The worry here is that as people watch the value of their homes shrink, they'll realize they're not as wealthy as they previously thought and will start to ratchet back on spending. In anticipation, investors have sold off retail stocks, sending the S&P Retail Index down more than 10% since the beginning of May. Shares of home improvement chains

Home Depot

(HD) - Get Report

and

Lowe's

(LOW) - Get Report

have dropped 16% and 15%, respectively, in that span.

Meanwhile, signs are mounting in the discretionary retail industry that spending is already slowing. Companies like

Chico's

(CHS) - Get Report

,

Borders

(BGP)

and

Williams-Sonoma

(WSM) - Get Report

reported disappointing quarterly profits this week, while

J. Crew

(JCG)

reported a loss in its first quarter as a public entity.

"Higher income consumers are feeling the pinch of a weaker housing market," concludes Thomas McManus, equity strategist with Banc of America. In a report Friday, he notes that U.S. mutual fund holders yanked $1.2 billion out of domestic equity funds this week, maintaining a steady pace of outflows for a month now.

As if expectations for a slowing economy and a falling stock market weren't bad enough, McManus says the Fed still may have some unfinished business when it comes to fighting inflation.

"The Fed is unlikely to signal the completion of the rate-rising cycle anytime soon, as inflation pressures continue to mount, driven now by wages that are beginning to rise more broadly," he writes.

While recent data on consumer and wholesale prices showed inflationary pressures under control, monthly employment reports have shown rising wages while oil above $73 a barrel remains worrisome.

"We already have a very tight labor market at high capacity utilization levels," says Drew Matus, an economist with Lehman Brothers. "If you add to that the lingering impact of high energy prices and the potential for a pass-through effect to other markets, what you end up with is a higher risk of inflation going forward. The slowdown in housing will help, because to the extent that it slows the economy, it could help contain inflation. But the problem is that inflation is an issue now."

In its August statement, the Fed did leave the door open to more rate hikes, and on Tuesday, Chicago Fed President Michael Moskow said "the risk of inflation remaining too high is greater than the risk of growth being too low."

Matus agrees "the cost of letting inflation get out of hand relative to the cost of containing inflation now is much greater" and predicts the Fed will resume raising rates in September. He concedes that the market stands in stark disagreement with him on that point now, particularly the Treasury market where yields remain below the 5.25% fed funds rate across the curve. The benchmark 10-year note was yielding 4.78% Friday, a four-month low and down 6 basis points for the week.

Matus says perceptions about future policy moves could shift when the minutes from the Fed's August meeting are released next week. The minutes are likely to reveal more details behind the well-publicized, lone dissent by Fed Governor Jeffrey Lacker to the Fed's decision to pause in August.

"It will be very hard for them to hide whether or not Lacker's dissent was just him, or whether it was a group of governors and they just chose, as they have in the past, not to have a more aggressive dissent," says Matus. "If there were more people who wanted to dissent, it would also raise the possibility of another Fed rate hike

in September."

So much for the "soft landing," indeed.