The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.By monitoring the ISM Manufacturing Index , investors are able to better understand national economic conditions. When this index is increasing, investors can assume that the stock markets should increase because of higher corporate profits. The opposite can be thought of the bond markets, which may decrease as the ISM Manufacturing Index increases because of sensitivity to potential inflation.So , could we use the ISM as a Risk ON / Risk Off indicator ? let's find out.
An ISM reading above 50 , usually indicate good economic condition, and vice versa when below 50. I coding this indicator/ strategy using trading view. For this specific code, I'll use the following rules .
Risk ON : If ISM > 48.50 on the last trading day of the month.
Risk OFF : If ISM < 48.50 on the last trading day of the month.
I'm testing this on the SPX index , which has much more data then the SPY ETF. Here how it looks like.
Lets take a look at the results:
Return from 1980 to present : 873 %
# Trades : 15 ( 14 closed , 1 open)
Drawdown : 25.1 %
Avg Trade length: 23 months
So based on these results, we can assume that this simple strategy using the ISM , can help us "time" the market. Further tests will be required before using this as a real strategy. You can reproduce this test by clicking here. It will bring you my Trading View page.