Despite consumer confidence in the U.S. being at its lowest level since March 2009, consumers opened up their wallets and took out their credit cards this Black Friday to the tune of $11.4 billion—the biggest year-over-year jump in consumer spending on Black Friday sales since 2007!

According to Chicago-based ShopperTrak, consumer spending on this Black Friday rose 6.6% from the same day in 2010. And online consumer spending jumped even more on Black Friday compared to last year—up 24% according to a Coremetrics benchmark.

Why so much emphasis on Black Friday sales? The actions of American consumers make up for about 70% of U.S. gross domestic product. Consumer spending is not just important to American companies; it is of utmost importance to foreign countries.

If consumer spending is rising sharply in the U.S., the manufacturing machine in China continues to roll, the fears of a China’s economy cooling too quickly subside, and China continues to buy U.S. Treasuries. It’s all one big cycle based on U.S. consumer spending.

But the million-dollar question remains: Are consumers out shopping because of pent-up demand or are the deals just too good to pass up? And if those deals are too good, will deep discounts translate into profits for the big retail companies?

The answer to this question won’t be known until retailers start reporting their fourth-quarter earnings some time in late January. For now, American consumers are back in spending mode and that’s good news for America, good news for the Chinese, good news for our stock markets!

Michael’s Personal Notes:

Stocks experienced their worst weekly Thanksgiving drop since 1932 last week—pushing stocks down to oversold levels again.

The Dow Jones Industrial Average has fallen from just under 12,200 on November 11, 2011 to 11,231 on Friday, a drop of almost 1,000 points. Twenty-two out of 30 major retailers in the S&P 500 were down Friday. Analysts were concerned about Black Friday sales going into the weekend and a sale of six-month government bonds on Friday by the Italy demanded a yield of 6.5%—the highest yield on Italian 183-day T-bills in 15 years!

But what a difference a weekend makes! Black Friday sales came in seven percent above last year’s level and rumor has it that the International Monetary Fund (IMF) is ready to give Italy a 600-billion euro loan…and, presto, futures on the Dow Jones Industrial Average are up over 200 points this morning.

Here’s the true story, my dear reader…

Plain and simple, the short sellers are covering their positions. We’re looking at a classic short-covering rally today. With the Dow Jones Industrial Average having fallen 7.9% in 11 trading sessions, the short sellers have made enough money. They don’t want to get caught up in the euphoria around better-than-expected Black Friday sales and a possible bailout of Italy, so they are quickly covering their positions, sending the Dow Jones Industrial Average sharply higher this morning.

According to Chicago-based ShopperTrak, retail stores in the U.S. racked up seven percent more in sales this Black Friday compared to Black Friday 2010. That’s a $1.0-billion increase in sales…news the retail stocks will benefit from.

Italian newspaper La Stampa reported this weekend that the IMF was preparing a 600-billion euro loan for Italy in the event its situation worsens. On Monday, the IMF denied the report.

Forget the rumors my dear reader. A child can see that, since August, the Dow Jones Industrial Average has been stuck in a trading range of 10,500 on the downside and 12,250 on the upside. Traders are buying stocks when the Dow Jones Industrial Average goes under 11,000 and shorting shorts when the Dow Jones Industrial Average goes over 12,000. Traders have been making a lot of money trading this bandwidth.

But once in a while traders get caught on the wrong side of the market, and today’s a perfect example of short sellers being on the wrong side, quickly covering their positions, and sending the Dow Jones Industrial Average higher.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average started 2011 at 11,577. Stocks have temporarily fallen below that level. I say “temporarily,” as I believe stocks have become oversold again (see “Michael’s Personal Notes” above).

I continue to believe we are in a bear market rally that started in March of 2009. I also believe that stocks will move higher before this Phase II bear market rally is over.

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

We’re pleased to announce: Sasha Cekerevac, BA Economics with a specialization in Finance, has joined Lombardi Financial. Sasha worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. Sasha has comprehensive knowledge of institutional money flow and how the big funds analyze and execute their trades in the market. We’re very happy to have Sasha on board. You’ll find Sasha’s contribution to Profit Confidential on our web site starting today.

Tags: Bear Market Rally, chinese economy, chinese stocks, Phase II bear market, stock market, U.S. economy, U.S. housing market