One of the most important economic indicators I track is indicating the bull market remains in tact. July’s Institute of Supply Management (ISM) Survey rose to a better than expected reading of 56.6, up from 53.8 in June. The Survey measures whether new orders, employment, and inventories at manufacturing companies are rising or falling. When the ISM Survey is rising, I interpret it as being bullish; when the Survey is declining, I interpret it as being bearish.
Despite the fact that manufacturing is only a small portion of the US economy, the Survey still has high information value. As shown in Chart 1, the ISM Survey is important because it tracks the Leading Economic Indicators fairly closely. And based on the ISM, the Leading Indicators should turn higher in August, implying that the economy will continue its path of strong and steady growth.
More importantly, the ISM Survey also tracks the twelve-month rate of change in the Dow Jones Industrial Average relatively well. As seen in Chart 2, the ISM Survey has been a good confirming indicator of stock prices over the last 10 years. Yesterday’s rising ISM Survey indicates the market remains in bull mode.
The Federal Reserve’s insistence on continuing to raise interest rates is one of the biggest risks for the market, especially if the economy slows. The Fed has a tendency to go too far in adjusting short-term interest rates, thereby artificially increasing or decreasing economic growth. Given yesterday’s strong ISM report, the Fed seems correct in their assessment that the economy remains healthy. That reduces the risk of the Fed tightening too much, at this time, which has bullish implications for the market.
In mid April, I was sure AAPL was forming a head-and-shoulders partetn, and was going to dip down to the $290 area. But the earnings call reversed it and took the price up, but not enough to break out to a new high. I suspect those pressures may be still there, and a drop to $290 can’t be completely eliminated, I think.So against that backdrop, I am keeping my eyes open to two scenarios. First, (more likely, I think), is that we go up from here. In the most bullish case, we would have an outside reversal where the price ends up in the green, but even a bounce to some number north of $315 or say, $317.50, would be very bullish short term. Then we will probably see a rally all the way back to the high $340s. Then we see what happens if the Falafel store at the mall falls apart, then the Apple store at the other end of the mall catches cold, and AAPL pulls back again. If the prop up Greece, then perhaps AAPL can finally break out of this trading range, especially with the earnings, Lion, new Macbook models, etc. happening during July.The second possibility is they continue to sell and the price ends at or below today’s low. In that case, I think there’s a capitulation sell off around the corner in the next few days that will test the $285-300 range.Sorry if I rambled on a bit too much.