By Tom Bradley

“Stock rally defies fears of a slumping economy.”

That was the title on an article in today’s Report on Business. To me, it’s further evidence of the macro mania that I wrote about in last weekend’s Globe article (Three Market Waves That Can Rock Your Portfolio). Investors are looking at the big picture (Spain, Washington, China) and considering little else in their decision-making process. So when they see the market going up when Europe is facing impending doom, they don’t get it.

The problem is that there’s a lot else that goes into market returns. I sort the myriad of factors into three categories – fundamentals, valuation and sentiment.

Certainly the economic outlook looks poor, but Spain etc are not the only fundamentals at play. It also matters what’s going on with the companies in the portfolio – new products, market share gains, free cash flow, acquisitions, emerging markets expansion and dividend increases.

As for valuation, if stocks get too cheap, they can go up in any news environment. People shook their heads all the way through 2009 as stocks skyrocketed. Was there lots of positive news at that time? Not that I remember. The news was probably less bad, which helped, but the first six months of that rally were driven by one thing - stocks got so cheap in the fall of 2008, they were trading at unsustainably low multiples. Now May, 2012 wasn’t March, 2009 in terms of valuation, but multiples were pretty reasonable going into this market run.

Beyond fundamentals and valuation, Art Phillips taught me to look at one other factor – market sentiment. He used the mood of the market as a contrarian indicator. In other words, if everyone is bullish, it’s time to get more cautious. And when investors are scared and bearish about future prospects, it’s a time to put some blue (buy) tickets on the trading desk.

Sentiment is far from a precise timing tool, but the investor fear that has been evident this year has provided some comfort that most of the distress selling is behind us.

Nobody knows where the markets will go during the remainder of the year, but be assured that the Euro crisis, U.S. election and China slowdown will only be part of the mix. There will be plenty of other factors at play as well.