The manufacturing recovery picked up momentum in July, with the ISM index rising to 54.2. Details paint a brighter picture than previous months as well, but headwinds remain that will keep a full rebound a ways off.

Higher ISM and stronger details to boot

The industrial sector’s recovery picked up steam in July, with the ISM manufacturing index climbing up to 54.2. That was a bit better than expected and marked the highest reading in more than a year.

A look at the headline’s sub-components show the underlying shape of the sector is improving a bit more rapidly. The production index rose nearly five points to 62.1 in July, and should stay strong at least in the immediate future with the new orders index notching a similar gain to land at 61.5.

At the same time, the supplier delivery index slipped 1.1 point to 55.8. Normally that would be a negative sign for demand, at least as it relates to capacity. In the current environment, however, the lower reading signals that bottlenecks in the supply chain are continuing to ease up after the index reached nearly a 50 year high of 76.0 back in April.

Inventories also weighed on the headline, but for the right reason as activity rebounded quickly last month. The inventory index, which is also included in the headline’s composite reading, was consistent with the fastest drawdown in inventories since March.

The fifth of the headline’s sub-components—employment—showed manufacturers continued to shed workers in July, but at a slower pace. The improvement bodes well for another increase in manufacturing payrolls on Friday, but further gains are going to get harder from here. A number of respondents noted the need to lay off workers ahead and consolidate facilities.

It is worth a reminder that the ISM can be prone to big swings at turning points in the cycle since it is a diffusion index based on the share of firms reporting an increase in activity versus a decrease. It is therefore a measure of the breadth rather than the degree of change in activity within the manufacturing industry. In that regard, manufacturing output still remains woefully depressed, down 11% from its pre-pandemic peak according to the Fed’s June industrial production report. Today’s ISM report shows manufacturers are digging out, but activity is still in a deep hole. Comments from the report reinforce that the better month does not necessarily mean a good environment. As a respondent from the fabricated metals industry put it, “while demand in the coming six months is stabilizing, it is at a significant reduction and clear that customers have little confidence in the forecasts.”

With depressed global growth, high unemployment and a resurgent virus, the sector continues to face strong headwinds. That said, manufacturers may be poised for a relatively quick recovery compared to services in this particular cycle. The need to limit close contact will weigh unusually heavily on services activity, whereas manufacturing could benefit from a higher share of consumer spending going to goods even as capex remains weak.

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A real-time quote for a fast moving stock may be more indicative of what has already occurred in the market rather than the price you will receive. Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays. Market makers may execute orders manually or reduce size guarantees during periods of volatility. When you place a market order, your order is executed on a first-come first-serve basis. This means if there are orders ahead of yours, those orders will be executed first. The execution of orders ahead of yours can significantly affect your execution price. Your submitted market order cannot be changed or cancelled once the stock begins trading. Initial Public Offerings may be Volatile IPOs for some internet, e-commerce and high tech issues may be particularly volatile as they begin to trade in the secondary market. 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For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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