How to Take Advantage of a Market Anomaly Today

Last week, we got data from the Chicago Purchasing Manager's Index (PMI), and it beat handily, coming in at 60.4, versus expectations of 55.0. Historically, there has been a 90% correlation between PMI and ISM data, which is due out at 10:00 a.m. Expectations are for 50.5. Last month saw a reading of 50.6, so the economists are predicting a dip from last month. Any reading above 50 indicates economic expansion, but there is plenty of market chatter and rumors this morning that ISM data will miss estimates, and show a reading of around 48 or 49, which would indicate economic contraction. Traders may want to consider the relationship between PMI and ISM, considering how low market sentiment is for the data. There was a report in the Wall Street Journal done earlier this year that shows that the ISM and PMI have historically had a 90% correlation to one another. With a larger than expected beat from the PMI data on Friday, ISM may very well come in better than expected, based off of historical trends. We have seen equities, especially momentum names, start to break down in advance of a recession which many believe is coming, but the PMI data is not confirming it. Neither is rail-road data, but the ISM data due out today will be a huge signal for whether the economy is actually slowing and going into a recession, or whether the equity markets have this wrong. St. Louis Federal Reserve President James Bullard said that we could see more quantitative easing if the economy continues to slow, but ISM and PMI just are not confirming that, just yet. Second quarter GDP came in at 1.4%, better than expected. The economic data is not as bad as many would like you to believe, but it is certainly not great either. We are clearly in a slow growth environment, but it does not look like we are going into a recession, just yet. We may very well go there, but not right now, if PMI and ISM are to be believe. ISM beat expectations last month. Having said that, with expectations so low for ISM and sentiment generally negative overall, there could be a snap back rally today should ISM deliver better than expected results. Traders may want to consider some shorter term trades if they believe that ISM will continue its historical trend, and be in correlation with PMI. ACTION ITEMS:

Bullish:
Traders who believe that ISM will beat expectations might want to consider the following trades:

• Names like Caterpillar CAT, Deere & Co. L and Cummins CMI could see a little bit of a snap-back today.

Bearish:
Traders who believe that ISM misses expectations may consider alternate positions:

• Consider go long the inverse ETFs, such as ProShares UltraShort S&P500 ETF SDS, or Direxion Daily Finan. Bear 3X Shs ETF FAZ.
  
  

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