Apparently conflicting pictures pose a quandary for market strategists: Should an investor emphasize the negative indicators for the U.S. economy or the upward trend of the stock market?
The U.S. economy may be lurching into another crisis, but you would not know it from the stock market, where an epic party is under way.
Since March 2009, the Standard & Poor's 500-stock index has risen 125 percent. This year, the S.& P. 500 has not fallen for even a single week.
Irrationally or not, some investors who were on the sidelines have become emboldened enough by the rally to start buying stocks, fund flow data show.
Yet this effervescence belies some ominous developments in politics and the economy. After the State of the Union address by President Barack Obama on Feb. 12 -- and the negative reaction to it by many Republicans in Congress -- it seemed quite possible that $1.2 trillion in automatic government spending cuts might begin in a few weeks, delivering yet another blow to an already lackluster economy. Most economists had expected minimal growth this year, even without a new shock from Washington -- or from Europe or anywhere else.
These apparently conflicting pictures pose a quandary for market strategists. Which signals should an investor emphasize: the signs of disharmony in Washington and the negative indicators for the economy or the upward trend of the stock market?
For Laszlo Birinyi, a veteran strategist and longtime market bull, the contest is not close. He says he starts by assuming that the market is smarter than any analyst. "We focus on the market itself, on what it is actually telling us," he said. "We don't worry about the cosmic issues that a lot of people get concerned about. We worry about the stock market ticker. And it's telling us the market is going up."
In September 2009, when very few strategists were overtly bullish, Mr. Birinyi, president of Birinyi Associates, a stock market research firm in Westport, Connecticut, said that the United States was in the early stages of a classic bull market. That analysis was prescient. The S.& P. 500 has returned more than 50 percent since then.
In a conversation last week, he said the country was in the final stage of that bull market. "The bull market probably has between a year and three years to go," he said. "I can't time it. I can only point out the trend."
Mr. Birinyi, formerly chief stock market analyst at Salomon Brothers, uses a combination of quantitative and subjective analysis. He carefully meters money flows into and out of stocks and scours business coverage in newspapers and magazines, which he sees as barometers of popular sentiment.
Money flow, as he measures it, comes from an algorithm he devised at Salomon. "Trades made on a price uptick are treated as buyer- initiated," said Jeffrey Yale Rubin, director of research at Birinyi Associates. "On a downtick, it's seller-initiated."
As Mr. Birinyi put it, "we care about what traders are actually doing with the money." Mutual fund flows are widely tracked, he said, "but they aren't as critical as most people generally think." They tell you how much money is being given to a money manager -- an intermediary. "The critical issue is how that intermediary is actually using the money," he said.
The firm's calculations indicate that in January, net money flows
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