The first and foremost trend to watch for is employment. The U.S. economy runs on the backs of consumers. They account for about 67% of the gross domestic product (GDP). When people spend, the economy grows; people have jobs. The risk is that if everyone is spending too much, inflation becomes a problem as more people buy fewer goods and services, driving up prices. The concern is not that everyone finds employment. That would be great. It's the fact that once employed, Americans have a tendency to spend their paychecks and then borrow to spend more, confident in their abilities to pay any debt off in the future. (Sounds familiar.) That's exactly the pattern that got us into our current mess.

Will history repeat? Sure. Don't know when but it will. However, in any recovery in the near future, we won't see excess spending and borrowing. Banks are in a much different mind-set. So are consumers. We've all crashed back to reality after flying a little too high, including lending institutions. The recovery may very well be slow and steady this time as the psychological damage done by 2008 should take years to heal. But the recovery depends first and foremost on people finding employment, or people with jobs having confidence they will keep them. Once that happens, they will go out and buy durable goods such as cars and appliances, as well as assets like homes.

Watch for an increase in employment. When that happens the stock market will improve. Employment is the most necessary ingredient to the ultimate recovery for the economy. Government spending isn't a recovery program, it's a delaying program that costs everyone a lot of money. Still, something had to be done to restore some confidence in the U.S. How it all works out is yet to be seen, but one thing we know for certain: all the money that was paid out for government programs will have to be paid back. That means higher taxes for somebody, maybe everybody. Higher employment is a good sign for investors.

The next important sign to watch for is housing. It's one of the main drivers of the economy because of the employment it generates, as well as the goods and services it needs. Right now home sales are improving, both new and existing. But there's still an imbalance in the market between supply and demand. Foreclosures are still coming on to the market. Those have to stop before housing will be a positive factor, and new homes built at much higher rates than presently. Housing is big. When it improves, so will the market, not just the housing stocks. It's another good sign for investors.

Inflation can stop the market in its tracks unless productivity rises faster than prices. And inflation is most likely coming unless the Fed can figure out a way to take back all the money sloshing around in the economy. By adding funds to the economy, the Fed has increased demand without any commensurate amount of goods and services. That means more dollars chase the same goods and services that exist. That's a recipe for inflation. Fed chief Bernanke claims that he's already working on this. (If anyone is aware of and concerned about inflation, it's him.) If he's successful and inflation is kept low, he'll be able to walk on water as the economy recovers without the specter of higher prices. Time will tell. Inflation is one of the bad signs to watch out for. You'll see it in prices of goods and in the price of money (called interest rates.)

Another sign: auto sales. While it use to be said that what was good for General Motors was good for the country, we can't say that anymore. GM is no longer the driver it once was for the economy. It has squandered its large market share, letting Toyota and Honda grab more and more every year. Now Hyundai with its better-than-average sedan (the Genesis) for a lower-than-average price, is taking market share from both sides. Sales for Hyundai were up 47% in August when compared to the same month last year. Still, car sales should be watched. As they improve (hopefully), it will mean more jobs. And as global manufacturers are building more and more plants in the U.S., all car sales will benefit American workers.

Are these the only signs to watch? Absolutely not. And one month does not a trend make. In fact, the first good signs will be when the downward slide in housing, employment, and car sales stops. Forget about improving. We've seen that part of the housing market is doing better. Car sales were artificially pumped up by the clunkers program, and time will tell if there's more demand behind those sales. The big wrench in the gears is employment. All investors are still holding their breath, waiting for the layoffs to stop, and jobs to start. That's the biggest and best sign yet to show up that will give this stock market the green light.

Ted Allrich is the founder of The Online Investor, founder of Allrich Investment Management, LLC, as well as the
author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he offers advice to investors who are just getting started.