ISM Index Beats Expectations!

The ISM index surprisingly beat expectations today as it turned in 35.6 vs 32.6 consensus. This surprising recovery in the ISM index turned what could be a totally dismal day into a mixed day as the Dow closed down 64 points and the Nasdaq closed up 18 points.

The ISM index is short for Institute for Supply Management Manufacturing Index. The ISM index, along with the Job Report, are the two most watched and followed economic indicator in the US market. The ISM index surveys purchasing managers in the manufacturing sector for an idea of how active the manufacturing sector is going to be, offering clues as to what's ahead for the economy. A high level of manufacturing activity is indicative of a growing and healthy economy. Indeed, the ISM index is so important not only because it is the first important number released each month, but also because of its correlation with Real GDP. In fact, a reading of 50 is believed to be consistent with a real GDP of about 2.5%. A reading above 50 indicates a growing economy while a reading below 50 suggests a contracting economy. Going by this standard, it is clear that today's number of 35.6 still indicates a contracting US economy.

Investors would be looking forward to more signs of stabilization in tomorrow's chain store sales and pending home sales index (see economic calendar) and most of all, looking forward to this Friday's Job Report. Volatility is going to be the name of the market this week.

On the technical front, the better than expected ISM index today did nothing to change the Dow's short term bearish momentum as it threatens to break significantly below 8000 today. With the short term momentum in favor of the bears, a follow up to downside tomorrow could see the November Low threatened before the week is up. However, if the 8000 level holds tomorrow and the Dow rebounds, the Dow's short term neutral trend would be intact.