Traders Whipsawed as ISM Revision Spurs 10-Point S&P 500 Pivot

Jun 02, 2014 1:30 pm ET

June 2 (Bloomberg) -- Markets that are getting accustomed to errors by exchanges and trading computers had to contend with mistakes in an economic indicator today.

The Standard & Poor’s 500 Index swung 10 points as the Institute for Supply Management corrected its May manufacturing index to 56 at about 11:30 a.m. in New York, saying it applied incorrect seasonal adjustments. The Tempe, Arizona-based group initially reported the gauge fell to 53.2 from 54.9 in April. A second revision didn’t move stocks.

“There will be a lot of upset people who probably lost money on this,” Joe Saluzzi, co-head of equity trading at Themis Trading LLC in Chatham, New Jersey, said in a phone interview. “You went short on that number and thought it was going to be bad for the market. Now you’re stuck on the short position. You have to go out and cover it and lose a lot of money. You’ve got to blame it on these guys.”

The American stock market has been roiled by everything from Nasdaq OMX Group Inc.’s three-hour shutdown in August to a fabricated Twitter posting that erased $136 billion from the value of U.S. stocks a year ago. Today’s misstep did less damage: the S&P 500’s decline following the first ISM release amounted to about $30 billion.

A software error that applied the wrong seasonal adjustment factor to the new data caused the initial error, ISM factory survey chairman Bradley Holcomb said in an interview. In a Jan. 29 press release on its website, ISM said the factors are used to reflect the effects of “repetitive intra-year variations” caused by weather and holidays, among other things.

Capricious Adjustments

“If this embarrassing episode has one useful outcome it is to remind us all how capricious seasonal adjustments can be,” wrote Michael Shaoul, who oversees more than $20 billion as chief executive officer at Marketfield Asset Management LLC in New York. “But the net effect is to transform the report from being slightly below expectations (but still OK) to one which shows a slight acceleration of activity from April to May.”

Such adjustments are too common in economic data generated by the government and private groups like ISM to take any of them seriously, said Barry Schwartz, a fund manager at Baskin Financial Services Inc. in Toronto. He helps manage C$665 million ($609 million) at the firm. 

“If traders get their heads handed to them, good,” said Schwartz. “The data screwed up, so what? A fat finger happens all the time in this environment. There’s just too much data, it’s overkill, and nobody should be making moves based on these types of numbers anyways.”

Finding Bargains

One trader’s loss was another’s gain. Irwin Michael, a fund manager at ABC Funds in Toronto, said he got a bargain.

“As it happens, one of the U.S. stocks we’re trying to buy came down on the negative news, and now it’s up,” said Michael, whose firm oversees C$900 million. “We bought a bit on the way down and we’ll wait for it to come down again.”

The stronger number in ISM’s correction is more consistent with other economic data, said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama.

“We came in below expectations initially and then they revised it to in-line or slightly above expectations -- that definitely brought some money back into the market,” Hellwig said by phone. “That is a high-profile, headline, market-moving number and there were probably some trades that were made on it.”