The Institute of Supply Management (ISM) reported yesterday morning that its index of manufacturing activity rose during May, as compared to the previous two months. That’s encouraging because if manufacturing activity does improve going forward, the employment situation will also likely improve — a very positive development for the U.S. economy.

In fact, my research suggests that this leading economic and stock market indicator may have bottomed in March. Although my investment models haven’t yet given an aggressive buy signal for the equity markets, yesterday’s ISM report is another indication that the worst may be over for the U.S. economy and that stocks may trend significantly higher in the second half of this year.

Unless the major stock market indices were to break down through their intermediate price-support levels (of around 12,300 on the Dow Jones Industrial Average) on a big increase in trading volume, I urge you to ignore the recent pullback in stock prices. Keep in mind that stock market bottoms tend to occur after the majority of investors have exited the equity markets and the major financial news seems to be getting worse and worse.

Take, for example, October 2002. At that time, retailers’ orders for durable goods (such as home appliances, automobile, and consumer electronic devices) had fallen near a five-year low as a result of a recent slowdown in consumer spending; manufacturing activity had fallen sharply in the preceding months; and there was talk of invading Iraq.

Not surprisingly, investor sentiment had turned decidedly bearish, according to the American Association of Individual Investors. Yet, stocks turned higher the following month and continued to rise sharply over the next year, after temporarily pulling back in March 2003.

Although the U.S. economy will continue to face some significant hurdles over the coming months, my research indicates that the current investment environment shares many similarities to the October 2002 period, and that stocks could turn higher during the second half of this year.

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