How to Trade the ISM Manufacturing PMI Announcement

10/22/2009 12:01 am EST

Focus: STRATEGIES

S. Wade Hansen

Co-Founder, Profiting with Forex (PFX) and Learning Markets

The market struggled recently to overcome another negative economic release. The Institute of Supply Management (ISM) manufacturing report declined slightly to 52.6 in September. If the reading is above 50, the economy is considered to be growing, and a release below 50 is indicative of contraction. However, it should be noted that on the positive side, this is the second month in a row of above 50 readings since July of 2008. When looked at within the trend, today's ISM number is actually a positive sign that economic recovery is still underway.

ISM Manufacturing PMI: A Glimpse into the Health of the Economy

Once a month, the Institute of Supply Management, a private firm, gives us a glimpse into how well large manufacturers are doing. Traders love this information because manufacturing numbers can tell them a lot about how the economy is doing.

See when the ISM Manufacturing PMI Announcement is scheduled with the MoneyShow.com/Econoday Economic Calendar.

When the ISM Manufacturing PMI number is above 50, it indicates the manufacturing sector is expanding, which means the economy is growing and stocks will most likely increase in value.

Conversely, when the ISM Manufacturing PMI number is below 50, it indicates the manufacturing sector is contracting, which means the economy is contracting and stocks will most likely decrease in value.

Of course, there are certainly other factors you should be looking at when determining the health of the economy.

What Is the ISM Manufacturing PMI Number?

The Institute of Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) number is compiled from a survey of purchasing managers. Purchasing managers are on the front lines of manufacturing and see first hand how businesses are performing.

When business is good, purchasing managers have to buy more raw materials to fulfill orders. When business is bad, purchasing managers have to buy fewer raw materials to fulfill orders.

You can see the most recent ISM Manufacturing PMI report here.

Manufacturing Stocks to Watch

Here are a couple of the companies with broad economic reach that you should keep an eye on:

1) Caterpillar Inc. (NYSE: CAT)
2) Deere & Company (NYSE: DE)

Watch the video for more details:

By S. Wade Hansen of LearningMarkets.com

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