Analysing and trading with the PMI index

Among the various economic indicators that investors use to carry out their stock market analyses, there's the PMI index which is one of the most anticipated. When this index was published, the financial markets showed significant upward and downward movements. Here, we'll explain how this indicator works and how to interpret and use the PMI index in your stock market investment strategies.  

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Analysing and trading with the PMI index

What is the PMI index?

First of all, remember that the Pmi index is an indicator reflecting the confidence of purchasing managers in a specific sector of activity. This level of confidence is expressed in the form of a percentage and obtained by means of a survey carried out each month among purchasing managers who are the major clients. The PMI index is also made up of 5 major weighted elements namely:

  • Order intake 30%
  • Production 25%
  • Employment 20%
  • Deliveries 15%
  • Stocks 10%

Three financial institutions are in charge of publishing these PMI indices, namely the Institute if Supply Management, ISM, the English company Markit and the Singapore Institute of Purchasing and Materials Management, SIPMM.

The PMI indices are also classified in 4 categories according to the sector of activity concerned:

  • The manufacturing sector PMI
  • The service sector PMI
  • The construction sector PMI
  • The PMI of global economy or PMI Composite.

PMI indices are therefore based on the psychology of purchasing managers for a period and at a given time.


How to understand PMI indices?

The PMI index has the advantage of giving a quick overview of the economic situation of a sector of activity or of a country. They make it possible to anticipate variations in GDP, inflation or the trade balance.

But the PMI measures above all the level of confidence of specialists. So when a PMI is above 50%, it means that purchasing managers are confident and anticipate economic expansion. Otherwise if the PMI is less than 50%, it means that purchasing managers expect an economic recession.


Use and interpretation of the PMI index to trade on the stock market:

To use the PMI index as part of a stock market investment strategy, it's prudent to take some precautions and not rely solely on the upward or downward signals sent by it.

We know that PMI indices are published one month late, which explains why it is complicated to use them for a short-term trading strategy. Sometimes, particularly in the event of a serious financial or economic crisis, PMIs do not show signs of recession until too late.

PMI indices can also send false signals with false negatives or false positives depending on the case. This means that a PMI below 50% does not mean that a recession is coming and vice versa, a high PMI will not necessarily be a guarantee of growth.

So, while it's interesting to use PMI indices as indicators on the stock market, you should in no case base your strategy solely on this indicator. However, you can take the opposite view of this indicator. Historically, a PMI below 50% without risk of crash often leads to a wave of strategic purchases and also strategic decision-making by purchasing managers. A low PMI index can therefore ultimately lead to an increase in the medium term. Purchasing managers who show little confidence will reduce their investments and adjust their stocks and when they see that the danger has passed and that the crisis does not occur, they will have to reinvest and replenish the stocks and that will give the economy a boost.

In conclusion, you must learn to have a good grasp of the impacts of PMI indices on stock markets over time before using them as an indicator. However, it's strongly recommended to use it as a global indicator of market sentiment to confirm or deny your strategy and forecasts.

Frequently Asked Questions

When and where are the PMI indices published?

The PMI indices are published on a monthly basis by the organizations in charge of establishing them previously mentioned in this article. In Europe, the most widely followed indicator is that of Markit. You can find this indicator on economic calendars or on any website dealing with the stock market and even on your usual trading platform in the news section.

What other economic indicators should be consulted?

In addition to the PMI indicator, you should use other major economic indicators as part of your stock market analyses. Follow the figures for GDP with interest, the trade balance, employment, orders for durable goods, household confidence indices and even inflation for a given economic zone or sector of activity. All of this data is also easily accessible online.

Is the PMI index a technical trend indicator?

No! As we have explained in this article, the PMI index is a fundamental indicator the purpose of which is to capture the sentiment of purchasing managers regarding the economic situation of a sector or a market. . It is by no means a graphical indicator allowing to anticipate a trend. It is however possible to use it in conjunction with a technical analysis in order to maximize the relevance of your investment strategy.

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