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
