Manufacturing Data Lifts Stock Prices

One of my favorite economic reports is produced by the Institute of Supply Management, a manufacturing trade organization. Its monthly survey of purchasing managers called the Purchasing Managers’ Index (PMI) is useful because it summarizes current activity and expectations among purchasers for the future.

The PMI report is important because it measures manufacturer sentiment rather than just quantitative throughput. If manufacturers are doing well right now but are expecting a downturn soon, it will show up in the PMI report. Because it asks questions about the future, it tends to lag a lot less than other measures of manufacturing data.

There are versions of the PMI report in most economies, including one produced by IHS Markit that covers Chinese manufacturers called the Caixin Manufacturing PMI. That report was released on Sunday and showed that manufacturers were much more positive than originally expected. This matched a similar PMI report for China released on Saturday by the China Federation of Logistics and Purchasing.

Chinese manufacturing sentiment had drifted into negative territory last November, so the weekend PMI reports were seen as an important shift for equity and commodity prices. Oil rallied as expected, Chinese stock indexes spiked, and major U.S. stock indexes were also higher today.

As you can see in the following chart, the Shanghai Composite index broke out of its pennant consolidation pattern and entered a bull market today. I mentioned this same index last week as a potential red flag if it broke support. At this point, investors are temporarily in the clear, as most emerging markets should follow the Chinese indexes.

I also pointed out last week that the S&P 500 had paused at the neckline of its inverse head and shoulders pattern. If the index rallied from that point, it was more likely that the price would continue to rise in the short term. This analysis was based on historical studies of the success rate of inverse head and shoulders patterns that included a retest of the neckline versus those that did not retest their neckline breakout point.

In my opinion, the technicals today look good – however, it still makes sense to remain somewhat cautious. Earnings season for the first quarter will kick off near the April 14, and investors will be looking for improvement in operating margins, which have been deteriorating for almost a year. Even if prices continue to rise, I believe that traders will be looking for profit-taking opportunities at the prior highs near 2,900 to 2,950 on the S&P 500.