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Are Stock Bears Being Too Pessimistic?

Glimmer Of Hope

Monday's widely-followed ISM Manufacturing Index came in above expectations with a reading of 52.8. A reading above 50 indicates growth in manufacturing. A broad recession is typically defined when ISM drops below 43. Therefore, today's figure does not align with the imminent recession theory.


Similar Weak Spot In 2005

As shown in the chart below, recent ISM readings have been trending down. The green box shows ISM rebounded in May 2005 from a level very close to the number released Monday.

ISM Manufacturing


ISM Reading Not Unusual

When ISM was floating around 50 in 2005-2006 and 2011-2014, stocks were able to push higher. Starting with a similar ISM reading, the S&P 500 gained over 29% from May 2005 to the bull market peak in 2007.

$SPX S&P 500 Large Cap Index INDX


Are The Charts Hinting At An Imminent Bear Market?

The economic data has been concerning in recent weeks, but it has not reached "imminent recession" levels. This week's stock market video looks at 2015 versus historical transitions from a bull market to a bear market, allowing us to better understand the odds of a new bear rearing its ugly head.

Video: What Are The Odds A Bear Market Has Already Started?


Investment Implications - The Weight Of The Evidence

As of Monday afternoon, the S&P 500 remained in an upward-sloping trend channel with a bullish bias. The bears could pick up some short-term momentum with a close below 2064.

$SPX S&P 500 Large Cap Index INDX

The facts and hard evidence we have in hand continue to call for an equity-heavy portfolio. With a monthly employment report and deadlines in Greece still on this week's calendar, we will enter each day with a flexible, unbiased, and open mind.

 

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