Bad ISM Number Strongly Suggests Upcoming U.S. Recession

 |  Includes: IWM, QQQ, SPY
by: Nicholas Pardini

Monday's ISM manufacturing index printed a contractionary number of 49.7. This is the first time since July 2009 when American manufacturing has contracted. What was most noticeably foreboding was the 10+ point decline in both new orders and prices paid for goods since May.

The ISM is not the first point of economic data that points to a US recession, but its plunge to contraction confirms similar warnings signs that have come from below expectation regional Fed indices, retail sales, and non-farm payroll numbers. Negative earnings guidance from consumer cyclical companies such as Nike (NYSE:NKE), Bed Bath & Beyond (NASDAQ:BBBY) and Ford (NYSE:F), along American total petroleum usage falling to 1998 levels, also point to the arrival of a US recession.

Nevertheless, the S&P 500 rallied once again today and is trading just 3.77% below 2012 highs. Commodity prices, Chinese economic indicators, Japanese manufacturing contraction, and European GDP contraction, also paint a largely bearish picture for the international economies as well.

What does this mean for investors? For those with a trading horizon longer than five days, it means to get ready to short American equity markets such as the S&P 500 (SPDR S&P 500 Trust ETF: SPY), NASDAQ (PowerShares QQQ Trust ETF: QQQ), and Russell 2000 (iShares Russell 2000 Index ETF: IWM). The recent outperformance of the US markets versus weakened European and emerging markets also gives them more room to fall in the event of a US recession or simply the realization of no further liquidity up until the end of election season.

The only thing at this point supporting the currently high valuations for the market is hope for further easing from central banks. With the Fed tying its hands through extending Operation Twist past election season and the ECB making its rate announcement this Friday, anything short of an LTRO-like stimulus will fail to support the markets appetite for cheap money.

With the intermediate term removal of the "Bernanke/Draghi put", expect a significant fall in both earnings results and equity prices as a whole (a bad jobs number on Friday can accelerate the beginning of the breakdown). Technicals are mixed, so my bearishness is solely based on the fundamental deterioration in the US economy and the failure of the Europeans to honestly solve their debt crisis.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SPY, IWM, QQQ over the next 72 hours.