Confident Consumers May Leave Dollar Days Behind

If middle class consumers flocked to discount retailers from Big Lots (NYSE: BIG) to Walmart (NYSE: WMT) during the Great Recession, does an improving economy mean the beginning of the end for the dollar stores?

From a short-term trading perspective, the most interesting dollar store is Family Dollar Stores Inc. (NYSE: FDO). Shares of FDO have pulled back for five days in a row, the last two in technically oversold territory, just above the 200-day moving average.

The last time FDO was as oversold as it is heading into trading on Friday was six weeks ago in early January. Then, a short, sharp drop ended a pullback that took Family Dollar Stores lower for four out of five days and into technically oversold territory. After seven days of treading water, the stock began a three-day climb to new, short-term highs and a gain of more than 4% from that initial oversold close.

Family Dollar Stores has a 7 out of 10 rating, which puts the stock at the upper end of our neutral category, and a positive edge in the short-term of more than 1%.

Elsewhere in the sector, stocks like Dollar Tree (NASDAQ: DLTR) and Dollar General (NYSE: DG) have begun to trend sideways after rallying into overbought territory near new, long-term highs. Trading near oversold levels after selling off for two days in a row heading into Friday’s session were shares of Pricesmart (NASDAQ: PSMT). Here, breakeven trading on Thursday has limited the stock’s short-term edge to just over half a percent.

Note that Dollar Tree is scheduled to report quarterly earnings next week on Wednesday.

Coming Spring 2012: the second edition of How Markets Really Work: A Quantitative Guide to Stock Market Behavior by Larry Connors and Cesar Alvarez. Click here to learn more.

David Penn is Editor in Chief of