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May ISM Weakens

06/04/2013

On Monday morning, June 3, the Institute for Supply Management reported the U.S. May ISM Manufacturing Index (Figure 1.1) at 49.0. This is the weakest reading for the index since June 2009’s 45.8. Additionally, the composition of the report displayed significant weakness throughout.

Let’s take a look at the internals....

  • May ISM fell to 49.0 from 50.7 in April
  • Consensus estimates for the May ISM was a modest rise to 51.0
  • New Orders fell to 48.8 from 52.3 in April
  • Inventories rose to 49.0 from 46.5 in April
  • The New Orders to Inventory ratio at (-0.20) slipped into negative territory for the first time since last summer
  • Production fell to 48.6 from 53.5 in April
  • New Exports Orders fell to 51.0 from 54.0 in April
  • Employment fell to 50.1 from 50.2 in April
  • Imports fell to 54.0 from 55.0 in April

Commentary

Within my May 23 blog “An Ugly SPX Reversal” I highlighted that in each of the previous 2013 post-FOMC minutes scenarios, a brief correction followed but quickly reverted back to the 2013 prevailing bull trend. This time around, it appears the post-FOMC correction wants to extend slightly longer before resetting the bullish momentum.

After Monday morning’s ISM release, I would caution investors that the restart button for 2013’s prevailing bullish momentum might not be pressed relatively soon. In fact, I suspect the next round of corporate earnings is the logical catalyst for the bullish momentum’s return. The problem is that is not for another 45 calendar days.

The reason for my near-term market trepidation is plain and simple: there now exists too much confusion. Unfortunately, the confusion exists in three critical areas:

  1. FOMC policy – taper or increase?
  2. Fund flows – cyclical or defensive?
  3. U.S. Economic Growth – above or below trend?

For the first time this year, there is clear confusion surrounding each of those issues. Along with the confusion comes a lack of confidence, which is vital when allocating toward risk assets.

The burden of proof now rests with bullish forces. Evidence must present itself in the coming weeks to clear the confusion and restart the bull trend. Otherwise, June is positioned to be rather frustrating. Although frustrating, the current S&P 500® Index (SPX) closing price of 1640.42 still remains above the critical support level of 1597.35 outlined in my May 23 blog. A reduction in allocations would be warranted below there. 

Figure 1.1 U.S. ISM Manufacturing, September 2008 to Present

6-4_Terranova_1
Source: Bloomberg

Figure 1.2 S&P 500 Index (SPX), Year to Date

6-4_Terranova_2
Source: Bloomberg

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