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The ISM trade: 'Downgrading economists to pure morons'

In her 2000 hit "Try Again," Aaliyah sang, "If at first you don't succeed, you can dust yourself off and try again." The Institute for Supply Management certainly took that lesson to heart on Monday, when it corrected its May manufacturing number not once, but twice—significantly moving stocks and bonds, and significantly annoying market participants in the process.

When the ISM May manufacturing index was released at 10 a.m. EDT, it came in at 53.2, below expectations of 55.5. But the institute soon said it had applied the wrong seasonal adjustment to the May data, which led to a depressed number, and corrected the reading to 56. However, shortly after this correction, ISM recorrected the data, saying the index actually came in at 55.4—nearly exactly in line with expectations

Read MoreUS factory activity slows; construction spending up

Stocks and bonds certainly reacted to the news.


Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

The S&P 500 took a hit at 10 a.m. on the initial release, and then crawled back to about where it opened the day (hitting a new all-time high in the process). Meanwhile, Treasurys rose sharply (sending yields lower), before turning back around and declining on the day. Similarly, the CBOE Volatility Index spiked shortly after the initial release, before trading back down.

"Whatever comes across the tape, the macro algos are going to react to it in their model. And then when the correction comes out, they'll react to it again," said Brian Stutland of Equity Armor Investments. "If you're volatility trading, then durable goods, jobless claims, and ISM are important numbers that are needed to find out if you should be buying or selling volatility."

The ISM manufacturing index is compiled from a survey of purchasing manufacturers, and because it is an important indicator of where the manufacturing sector is headed, it is considered a key leading indicator of the economy as a whole.

Read MoreThis number could tell us where America is heading

"They're kind of important numbers not to [fudge] up," Stutland added.

This is not the first time the ISM has made an error around the manufacturing index. Paul Ashworth, chief U.S. economist at Capital Economics, recalls that ISM once confused investors by releasing the nonmanufacturing report when the meant to release the manufacturing one.

"It's a survey with a long history that's had close correlations with economic growth over the last few decades," Ashworth told CNBC.com. "It's just unfortunate that they've done it more than once—made a mess of it, that is."

Michael Block, chief strategist at Rhino Trading Partners, was significantly less calm about the error.

After releasing a note on the initial release in which he commented that "Based on this number, US growth is hitting a wall," Block sent out a new note on the revision, this one entitled: "Upgrading ISM From Bumping Along to Going Fine for Q2; Downgrading Economists from Clueless Nerds to Pure Morons."

The institute did not immediately respond to CNBC's request for comment.

When reached in his office, Block confided that errors like these are "why I don't like writing about economic numbers. It's a [freaking] joke."

Block said he's looking ahead to Friday's employment report, but worries that "we're going to find out on Friday afternoon if that one's screwed up, too. And I'm just going to lose all faith and go to medical school or something."

Yet some are taking a Zen approach.

"Find the number that works and go with it," trader Anthony Grisanti wrote to CNBC.com.

—By CNBC's Alex Rosenberg.

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