Traders will be looking to housing data this week for more confirmation that the American economy is gradually improving.

Reports on existing home sales and new home sales are the highlight of a week featuring low late-summer volumes, a lack of corporate earnings news and a light economic calendar.

The Toronto stock market finished last week with a respectable up 1.67 per cent gain that left the TSX at its highest level since early May, when the European debt crisis took a turn for the worse as markets focused on high debt levels in Spain.

It also left the TSX ahead of where it started 2012 trading.

A key piece of data that helped support markets last week was data showing U.S. building permits increased 6.8 per cent to a seasonally adjusted annual rate of 812,000 in July. That is the highest level since August 2008.

"People that follow this closely will say housing starts have such a big impact on economic growth, just from an economic point of view and the multiplier effect of that kind of activity," said Garey Aitken, director of equity research at Bissett Investment Management.

"And within the last couple of years, we reached lows we hadn't seen since the 1950s or 60s."

Traders hope to see further evidence of a recovering U.S. market this week when data comes out on existing home sales Wednesday, followed by new home sales data the following day.

"We don't even have to get back to the peak years," added Aitken.

"Even if we get something in between, that provides a significant amount of quality stimulus to the U.S. economy."

Economists expect existing home sales rose about three per cent during July to an annualized rate of 4.5 million.

They also forecast that new home sales for July ran up 4.3 per cent to an annualized rate of 365,000.

Markets have been buoyed by hopes that central bankers are prepared to do whatever is necessary to keep the economic recovery on track and preserve the European monetary union.

There have also been strong recent run of U.S. economic data showing improving American job creation, and better than expected summer readings for retail sales, industrial production, housing starts and industrial production.

"There's two ways of looking at this rally," said Colin Cieszynski, market analyst at CMC Markets Canada.

"One is that you had a nice run up off the July employment report and now you have just gone sideways, so people are just kind of sitting on their hands and waiting for the next thing to happen."

But while the economic news out of the U.S. has been generally supportive, there is still a lot of potential risk from Europe.

"And people are saying OK, now does the next shoe going to be the one that drops on my head or the one that kicks the markets forward again," said Cieszynski.

"So you are kind of in this stabilization point where people aren't quite sure which direction to go from here."

Traders have been looking for the U.S. Federal Reserve to embark on another round of stimulus to support the recovery, but more and more data suggests that conditions are not nearly dire enough for the central bank to act.

There have been suggestions that Fed chairman Ben Bernanke could announce further stimulus measures around the same time as the central bank's meeting in Jackson Hole, Wyo., at the end of the month.

"I don't think they're serious about really doing it because the economy is not falling apart," said Cieszynski.

"And on top of that, you have the U.S. election coming. The Republicans are looking for any economic thing to turn into an election issue and the last thing the Fed is going to want to do is anything to get the GOP going."

The major Canadian report of the week comes out on Wednesday. Statistics Canada was expected to report that June retail sales rose by 0.1 per cent, down from a 0.3 per cent rise the previous month.

"Consumer confidence hit its weakest level this year (during June)," said BMO Capital Markets senior economist Benjamin Reitzes.

"A persistently uncertain global backdrop and weakness in equity markets have weighed on sentiment."