Conclusion: the June ISM Non-Manufacturing report supports Hedgeye’s Bear Market Macro theme for Q3.
This morning ISM released its Non-Manufacturing report for June. Relative to May’s reading of 55.4, this morning’s 53.8 should be seen for what it is – a sequential slowdown in growth on a month-over-month basis.
We like to think our risk management process is duration agnostic. That is, we consume immediate term data within the framework of a multi-duration model (TRADE, TREND, and TAIL). From an immediate term (TRADE) and intermediate term (TREND) perspective, what’s clear in the chart below is that the slope of the line has turned negative. What was probably less obvious to the bulls is how this morning’s ISM Non-Manufacturing report fits within the context of the longer term picture.
We have circled 2 monthly reports with red circles – June of 2007 and 2010. What’s most interesting to us now is considering not only how elevated a reading of 53.8 is relative to where the US Consumer can take this chart (lower), but that there is a big seasonal factor to how this country thinks about the future. This is probably why bear markets tend to growl in the summer time and capitulate in the fall. The bulls are hungry for a bid that’s based on a forward growth outlook that just isn’t coming.
We’re not calling for a crash yet, but with every fleeting rally the SP500 has to a lower-high, we are asking ourselves why we aren’t. From ISM and housing reports to weekly jobless claims, the most recent data pertaining to US economic growth is bearish. To change the course of this chart’s path to the upside in the coming months would require a hope that we aren’t brave enough to sign off on as a probable outcome.
Our refreshed (as of 1PM EST) immediate term support and resistance levels for the SP500 are now 1001 and 1052, respectively.
Keith R. McCullough
Chief Executive Officer