The stock market has done a good job boosting the S&P 500 Index out of its trading range. Corporate earnings are coming in solid and, while some large-cap companies are saying that their businesses are slowing, others are reporting that business is getting better. The stock market has taken note, but this is a market trading on the debt crisis in Europe. Sector-wise, the technology sector has shown some real leadership, which, so far this year, has been lacking. It’s a good sign for the economy, but, as we all know, the housing and employment numbers continue to be weak (see Lots of Companies Doing Well, But the Marketplace Isn’t Listening).This is what’s holding back consumer confidence, even in the face of retail industry strength. The stock market can go anywhere from here. Making predictions is unwise.

Right now, we’re seeing some solid strength in the retail clothing sector. The stock market is rewarding these companies; many of which are trading right at their 52-week highs.

One benchmark company that I always like to follow in retail is V.F. Corporation (NYSE/VFC). This $15.0-billion retail powerhouse just hit an all-time record high on the stock market and is up approximately 60% since the beginning of the year. There was a correction in the broader stock market, but this company certainly didn’t feel it.

V.F. operates around 30 retail brands, most of which are household names. Some of these include: “The North Face,” “Wrangler,” “Timberland,” “Vans,” “Lee,” and “Nautica,” “JanSport,” “Reef” and “Smartwool.” If there is a company trading on the stock market that is a benchmark for the retail clothing market, then V.F. is it.

The company just announced record third-quarter financial results, boosted its dividend payment to stockholders and increased its 2011 full-year guidance. Revenues in the third quarter of 2011 grew 23% to $2.75 billion. Earnings grew 24% to $300.7 million. The company’s total revenues for all of 2011 are now expected to grow between 22% and 23%, and management increased its quarterly cash dividend by 14%, marking the 39th consecutive year of increased dividend payments to shareholders. By any measure, this is a tremendous business accomplishment for such a mature, large-cap company in a slow economy. You certainly could argue that this is a business worth owning. The trouble is that the stock market never has this pick down for very long. This stock’s been going up steadily since 1991, with only a few blips during major stock market corrections.

Other players in the retail clothing market are also reporting solid financial results. Columbia Sportswear Company (NASDAQ/COLM) reported record third-quarter revenues that grew 12% to $567 million. Earnings grew 29% to $67.5 million and the company raised its full-year 2011 operating margin outlook to approximately eight percent and its outlook for full-year revenue growth to between 15% and 16%.

Under Armour, Inc. (NYSE/UA) generated third-quarter revenue growth of 42%. The company’s earnings grew 32% and management also increased its 2011 full-year revenue and earnings outlook. Both Columbia Sportswear and Under Armour saw the stock market reward their great results accordingly.

While consumer confidence is at a two-and-a-half year low, the retail clothing sector is generating record financial results. There is a disconnect in the stock market at this time and it all has to do with investor confidence. What we need is more momentum on solving the debt crisis in Europe. While corporations aren’t doing a lot of new hiring, most are doing their part on the earnings front. Stock market investors see the numbers, but, in large part, are afraid to act on the news.

The New York-based Conference Board’s household sentiment index has slumped to the lowest level since March of 2009…

But hold on…don’t dismiss it as more bad news! It’s actually good news.

Sure the U.S. unemployment rate has held at about nine percent for about 30 months now. Sure, 8.75 million jobs were lost in the recession that ended in June 2009. And, with only about two million jobs created since the recession ended, the unemployment picture is not looking good. How can consumer confidence not be taking a beating?

There’s also the poor housing market. The S&P/Case-Shiller Index reported yesterday that home prices in 18-out-of-20 major U.S. cities fell again in August. It’s difficult for consumer confidence to rise when one-out-of-five U.S. home is worth less than the mortgage on it.

But think about this…

What happened to the stock market when consumer confidence hit bottom in March of 2009. We all know that stocks rose almost 100% from March of 2009.

And this exactly what I have been writing about for a month now. A couple of weeks ago, the number of bearish stock advisors hit a high not seen since March of 2009 (Source: Investors Intelligence). Now consumer confidence is at its lowest level since March of 2009.

It is during times of extreme bearishness and negative consumer confidence that the stock market rises. No, I’m not predicting that the stock market is going to double from its current level. But I am saying that investors, stock advisors and consumers are usually wrong when the majority of them have the same opinion. The stock market has historically done the opposite of the herd mentality. And I believe this time will be no different.

The more negative the consumer confidence reading, the more stock advisors who have turned bearish, the more the chances the stock market will climb the “wall of worry” higher. And that’s exactly what I believe is going to happen now. The poor consumer confidence reading released by the Conference Board Tuesday is good news for the stock market.

Michael’s Personal Notes:

Quietly, with little fanfare, the U.S. dollar has fallen to its lowest level against the Japanese yen since World War II. Yes, the country we beat in World War II—its money is now worth more than ours!

But it’s not just the yen that has been rising against the U.S. dollar. So far this month, the U.S. dollar has lost 4.4% of its value against a basket of industrialized country currencies. Actually, I’m surprised the U.S. dollar hasn’t fallen more in value against other world currencies.

Let’s face the unpleasant facts again:

The Federal Reserve has kept short-term interest rates near zero for almost three years now. On top of that, the Fed has purchased $2.35 trillion in assets to help spur the economy. The “official” national debt sits at about $15.0 trillion. When you include off-balance sheet government obligations, our debt stands at between $100 trillion and $200 trillion depending on whose report you believe.

Yes, the stock market has been rallying as of late. But we all know the U.S. economy is very fragile, very sick. We have a currency that returns zero interest rates issued by country that is awash in debt. And there are plenty of U.S. dollars in circulation to boot, thanks to the Federal Reserve’s expanding balance sheet.

From March of 2009, when U.S. stocks fell to a 12-year low, to today, the U.S. dollar index (a measure of the value of the U.S. dollar relative to a basket of six currencies: euro; yen; pound; Canadian dollar; Swedish korona; and Swiss franc) has fallen 16%. During the same period, the price of gold bullion has risen by approximately 80%.

“Michael, what is the long-term play here for investors?” What I see few people talking about is the effect of the debt crisis in Europe on the U.S. dollar. When Greece’s problems started to flare up in 2010, we saw investors running to the U.S. dollar. And we had a corresponding spike in the value of the U.S. dollar in the summer of 2010.

But today, the crisis in the Europe is graver than last year. Greece is bankrupt. Italy and Spain are not far behind. Citizen rallies against austerity cuts in Europe are becoming larger and more violent (70,000 Greeks protested against government cuts on October 19, 2011). And, against the backdrop of all this, the U.S. dollar is not rising, which is obviously negative for the greenback.

My strategy has remained unchanged. I’m exiting U.S. dollars for gold. If I’m right about future inflation, the value of the U.S. dollar will only continue to deteriorate, while the price of gold bullion rises even further.

Where the Market Stands; Where it’s Headed:

The stock market opens this morning slightly above where it started 2011. I continue with my opinion that we are in a bear market rally that started in March of 2009. The strong combination of investor pessimism, an expansive monetary policy, and stronger than expected corporate earnings will see the bear market rally continue to climb the proverbial “wall of worry.”

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years about how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming?  No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.

We all know that consumer spending accounts for about 70% of the gross domestic product (GDP) growth in this country. And when confidence is low, you also know consumers may be more hesitant to spend, holding back on any major purchases, such as homes, vehicles, furniture, appliances and travel, to list a few. This will impact spending and GDP growth and the ability of companies to expand their businesses and hire. This is my concern; I feel that continued nervousness among consumers will impact GDP.

Consumer Confidence in August was another disappointment, with a dismal reading of 44.5. The reading was well below the estimate of 52 and the revised 59.2 in July. The reading is the lowest since April 2009 and clearly indicates nervous consumers.

To tell you how bad the readings are, economists say that a reading of 90 indicates a healthy economy, something that has not happened since December 2007 when the recession began. It looks like it will be some time until the confidence reading heads back towards the pre-recession level of 90. My very basic economic analysis is that the situation is not good.

Moreover, add in the fact that the U.S. housing market remains in a mess after prices declined to below the lows of 2006 and you’ll understand my concerns going forward.

To drive the economy, consumers need to spend. We have interest rates at historical lows and quantitative easing. It is working, but not as fast as I would like to see.

The government can use fiscal policies, but with $14.2 trillion in national debt and at its ceiling looking for an increase in the debt level, we are just adding more debt to American taxpayers. Plus, spending more doesn’t mean consumers will join in.

On the plus side, the Durable Goods Orders reading for July was better than expected. The headline reading grew 4.0%, well above the estimate of 1.9% and the negative 1.3% reading in June. The ex-transportation reading of 0.7% was also better than expected. The readings offer some optimism, but then it is only one month. We need to see a pattern.

A strong housing market is also critical, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high foreclosures and short sales where homes are dumped below the mortgage value. The industry numbers support the weakness. Housing Starts of 604,000 in July were slightly below estimates and a decline from a revised 613,000 in June. Building Permits of 597,000 were also weaker than expected. New Home Sales fell to 298,000 in July, short of the 310,000 estimate.

Also consider that a key driver of the housing market is jobs. We need jobs and security in order to give buyers confidence to assume a mortgage and not to worry about losing a job and missing payments. The non-farm payrolls are due out on Friday and I’m not confident.

At the end of the day, we need to see confidence and the willingness to spend and not to worry about money. Only under this scenario will there be sustained spending and economic growth. Unfortunately, there is little for us to get excited about at this juncture.

When consumers are cautious, they tend to hold back on any major purchases such as homes, vehicles, furniture, appliances, and travel, to list a few. This will impact spending, GDP growth, and the ability of companies to expand their businesses and hire.

Consumer Confidence in May was another disappointment with a reading of 60.8, below the estimate of 66.3 and the revised 66.0 in April. The reading was the lowest since October 2010. To give you a better idea of how bad the readings are, economists feel that a reading of 90 indicates a healthy economy, something that has not happened since December 2007 when the recession began. It looks like it will be some time until the confidence reading heads back towards the pre-recession readings of 90. This cannot be good.

Add in the fact that the U.S. housing market is in a double-dip recession after prices declined to below the lows of 2006 and you’ll understand my concerns going forward.

To drive the economy, consumers need to spend. We have interest rates at historical lows and quantitative easing. It is working, but not as fast as I would like to see.

The government can use fiscal policies, but with over $14.0 trillion in national debt and a massive deficit, major spending increases may not be in the cards.

The Durable Goods Orders reading for April was weak with a 3.6% decline, weaker than the estimate calling for a 2.0% decline and below the 4.4% growth in March. Excluding the transportation element, the decline of 1.5% was also worse than expected.

These are not readings you can get excited about. There continue to be mixed readings.

The monthly retail sales numbers are mixed. Of the 24 retailers reported, 60% fell short of estimates, according to Thomson Reuters. The blame was on the higher gasoline prices and higher basic commodity prices in dairy, cotton, and meat. Consumers have a limited budget and, when expenditures rise in some areas, other areas are negatively impacted.

A strong housing market is important, as homeowners buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high foreclosures and short sales (where homes are dumped below the mortgage value).

Also consider that a key driver of the housing market is the jobs market. We need jobs and security in order to give buyers confidence to assume a mortgage and to prevent them from worrying about job losses and missed payments. The private ADP report was dismal.

At the end of the day, we need to see confidence and the willingness to spend without worrying about money. Only under this scenario will there be sustained spending and economic growth.