Investing is never an easy gig.
As the usual disclaimer goes — ‘past performance is no guarantee of future results.’
But an index called the PMI report could help you get a handle on key shifts in share prices — potentially revealing some of the best stocks on the market.
In essence, it tracks new orders, new export orders, imports and employment conditions among other things.
In Australia, PMI stands for Performance of Manufacturing Index.
In the US, the name for the PMI is the ISM (for the organisation which publishes it).
Why is the PMI so important?
In a post on Medium.com, pseudonymous writer Concoda highlights why the ISM (and, by inference, the Australian PMI) work:
‘The financial media are aware of the ISM but barely dedicate any time in covering the true power of this leading indicator. It doesn’t matter what stock you are trading: the ISM will have some influence over that stock price.’
Concoda provides the following rubric for understanding how to read the ISM, which we can use as a reference for the PMI:
‘ISM above 50 and increasing: positive outlook
ISM peaks above 50: neutral/negative outlook
ISM above 50 and decreasing: negative outlook
ISM below 50 and decreasing: negative outlook
ISM troughs below 50: neutral/positive outlook
ISM below 50 and increasing: positive outlook’
Not only does the ISM have a 90% correlation with GDP growth, some investors use it to pick individual sectors and stocks to trade on month to month.
This is visible in the connection between the ISM and Apple, Inc. [NYSE:AAPL]:
What’s next for the manufacturing industry?
The near future looks good for manufacturing in Australia with a 4.7 point upwards movement this month.
The Australian Industry Group publishes reports on the services and construction sectors as well.
As we have covered elsewhere earlier, the property market looks to be falling ‘back to reality’.
Building permits for dwellings are down 2.5% according to the latest ABS numbers.
This is reflected in the most recent Performance of Construction Index report which is down 2.3 points on its 12 month average.
At the same time, the report gets quite specific allowing you to drown out the noise and zero in on specific sub-sectors.
For instance, it notes that:
‘Engineering construction activity continued to expand in August, and at a slightly faster rate with the sector’s activity sub-index increasing by 0.6 points to 55.0 points. This marked the sector’s 17th consecutive month of growth in line with the boost from state government capital works.’
So while this may seem like a lot to digest, it isn’t.
Just keep an eye on the trends.
It is finally worth noting that the AI index for services are also down.
This could be the start of something big after 18 months of positive conditions.
Stay tuned to Markets & Money for further insights.
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