The June data for the number of background checks conducted under the National Instant Criminal Background Check System (NICS) was released this morning. Overall, the total number of background checks increased 18.1% on a YOY basis, but declined 5.4% from May to 968,145. The overall number of background checks is at the lowest level since August 2008. The chart below shows the trend in the number of background checks over the past 18-months (click on chart for full image view).

Source: FBI

This represents the third consecutive month that the number of background checks has declined on a month to month basis. Overall, the number of background checks has now declined 37% from the peak witnessed in November 2008. As we mentioned in our recent post on Smith and Wesson and Sturm Ruger, the June website traffic data to the leading online gun dealers suggests that demand trends are rapidly normalizing. We expect this trend to continue.

We are somewhat surprised by the strength in SWHC shares this morning. Bulls might argue that the sequential month to month decline in the number of background checks for June was not as large as that for May (-5.4% vs. -16.5%) and that the YOY growth increased from 15.5% in May to 18.1% in June.

We think some might overlook the impact of seasonality on the sequential trends in the number of background checks. Over the past five and ten years the average month to month decline in the number of background checks in the month of May has been 11.4% and 10.2%, respectively. As a reminder, the sequential M/M decline in May 2008 was 16.5%. In June, the average M/M decline in the number of background checks has been 2.0% over the past five years and 2.5% over the past decade. Once again the June 2009 M/M decline was 5.4%, well above historical norms.

We continue to argue that the deceleration trend remains firmly in place and would use this opportunity to increase short positions in SWHC and RGR.

As always, please act accordingly…