Sunday, February 5, 2012 EST

Purchasing Managers Index (PMI) is a very important sentiment reading, not only for manufacturing, but also the economy as a whole. Although U.S. manufacturing is not the huge component of total gross domestic product (GDP) that it once was, this industry is still where recessions tend to begin and end. For this reason, the PMI is very closely watched, setting the tone for the upcoming month and other indicator releases.

The chart below from 2003 - January 2012 shows that when the PMI index is above 50 (Expansion) the stock market will trend up. When the PMI falls below 50 (Expansion slowing) the stock market will trend down.  The PMI index can be a very useful way to make some determinations of where the market is headed in the mid to longer term.