So far in 2012, the market has been moving like a drunkard; two steps forward, a couple of steps backwards, going nowhere. The same negative news is still lingering: unemployment rate stays uncomfortably high; the eurozone has a new crisis every week.
But when examining stock market sector performance closely, one shall find that the economy and the U.S. stock market are on its path to a full recovery. A new bullish run is about to start in full force. Here are my diagnostic signals.
1. Auto sales rise sharply.
General Motors (GM) just reported that its auto sales were up 16% for June. What's particularly encouraging in the news is not sales growth itself, but how sales were growing. GM's sales of small cars such as Sonic actually dropped. Its big SUVs have seen sizable growth. Nothing shows the strength of consumer purchase more vividly than this. The numbers this year have been great for other auto manufacturers in general. In particular, since the composition of auto sales is migrating toward a larger, less economy, more luxury trend, Ford (F) would also likely benefit greatly from it.
2. Auto repair shop sales drop.
Last week, O'Reilly Automotive (ORLY) provided very lukewarm guidance for its business later this year. Its share dropped double digits on that day. I had predicted this two months ago in this Seeking Alpha article. Auto parts shops are a reverse indicator of auto sales: when people are buying new cars, they don't need much maintenance. Hence auto parts shops' businesses drop. The same goes for similar businesses like AutoZone (AZO), which I also wrote about in this article, AutoNation (AN), and Peb Boys (PBY).
3. Dollar store sales drop.
Family Dollar (FDO) missed the earnings estimates this quarter and the market has shaken if off so far. The stock didn't drop that much. But this in my opinion is a big warning sign for the whole sector. Other players such Dollar Tree (DLTR) and Dollar General (DG) should start to see their businesses shrinking soon, as I have argued in this article. Since the macroeconomic force can be so strong, the scale of stock underperformance in this sector could be comparable with that of Netflix's (NFLX) drop from $300.
4. Wal-Mart beat earnings estimates.
For its sheer size, Wal-Mart (WMT) is a very diagnostic business for the health of the whole economy. In May, it beat the earnings estimates on both top and bottom lines. Wal-Mart may also benefit from dollar store customers, now with more disposable income, switching up in the retailers they visit. Overall, Wal-Mart's beat sends a strong signal of the recovery.
5. Luxury product stocks underperform.
This may sound a little counter-intuitive: why should luxury product companies underperform when the economy is turning around? The logic lies in the movement of speculative money, not the businesses themselves. We all know that the stock market is forward looking and most of the time, it does so amazingly well. Luxury product companies tend to get overvalued when speculative money is hiding in these stocks during recessions -- obviously rich people can still spend when the economy is bad. However, when things are turning better, the speculative money flows elsewhere. This explains why both Tiffany (TIF) and Coach (COH) have been performing poorly recently.
In summary, signals from both consumer purchasing activities and investment movement suggest we may have a full economic recovery on the way. The trend has already started. After the consolidation this summer, and what's in my opinion a crying wolf "crisis" in the eurozone, we shall see a full throttle bull market in the second half of this year.