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Friday, January 21, 2011

ECRI's WLI Back to 36 Week High

The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, released their latest readings for their proprietary Weekly Leading Index (WLI) this morning. (More about ECRI
For the week ending January 14, 2011
  • WLI  is 128.9 up from the prior week's reading of 128.1 and equal to the reading for the week ending December 24, 2010.  These are the highest readings since 36 weeks ago  on May 7, 2010 when WLI was at 131.9.
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • Last week's ECRI WLI Update for January 14, 2011
  • Since apparently bottoming at -10.3 for the week of August 27,  WLI growth moved higher or was flat for the 21st consecutive week to plus 3.1% from plus 3.6% a week ago.  
  • WLI growth of 4.1% is a 34-week high.
  • The last time WLI growth was higher was the reading for the week ending May 21, 2010 when it stood at positive 4.9%
  • My Portfolios at All Time Highs as we Enter 2011
On November 30, 2010 we reported in "ECRI Calls for Revival of US Economic Growth" that ECRI said "with a lot of conviction, that there is a revival in growth right ahead of us."  Since then, the economic data continues to slowly improve.
Commenting on the January 14th release, ECRI's Co-Founder, Chief Operations Officer and author of "Beating the Business Cycle", Lakshman Achuthan said: " With WLI growth rising for ten straight weeks to a 33-week high, U.S. economic growth will soon begin to revive."
Chart of WLI and WLI growth vs GDP Growth   
click to view full size charts
Since ECRI releases their WLI numbers for the prior week and the stock market is known in real time, you can sometimes get a clue for next week's WLI from the weekly change in the stock market. Notably, in the lead-up to the last two recessions, the WLI turned down months before the stock market did.
Chart of S&P500 vs ECRI's WLI
I want to point out that a correction in the stock market now would not necessarily change ECRI's call for an economic growth rate revival.  It takes a "pervasive" (for the majority) change of direction of their indicators in a "pronounced and persistent" way for ECRI to call for a turn in the economic cycle. These indicators and the trigger levels are proprietary.  I have found no one who has duplicated them or ECRI's success in calling business cycle turns based on their reading of their indicators.
Note that the chart above of the S&P500 vs. WLI shows a breakout above the dashed blue line that represents the neckline for a "Head and Shoulders Bottom" pattern.  This is a very bullish development.  A correction to test the pattern from above with a bounce to a higher high would be even more bullish, but not necessary for a continued market advance.
Chart of WLI from 1973 to 2010
Chart courtesy of ECRI
  1. The WLI for the week ending 1/21/11 will be released on 1/28/11
  2. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
  3. ECRI uses the WLI level and WLI growth rate to HELP predict turns in the business cycle and growth rate cycle respectively. Those target cycles are not the same as GDP level or growth, but rather a set of coincident indicators (including production, employment income and sales) that make up the coincident index. Based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below negative ten, but no recessions resulted (although there were clear growth slowdowns).  
  4. For a better understanding of ECRI's indicators, read their book, Beating the Business Cycle.
My take on ECRI's indicators, WLI and FIG plus how they relate to investments is included in "Kirk Lindstrom's Investment Letter."  FREE SAMPLE

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 212%  vs. the S&P500 UP only 25% vs. NASDAQ  UP a only 22%   (All through 12/31/10) 
In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 1.8%

In 2010 my "Explore Portfolio" gained 20.5%!!
vs. the DJIA up 13.8%
(the explore portfolio has 70% in equities and 30% in fixed income so the stocks are doing very, very well)

KEY ECRI Articles:

Lakshman Achuthan - Beating the Business Cycle

“This easy-to-read book tells you how the respected ECRI calls turning points, and how you can, too.”
—Jane Bryant Quinn, Newsweek columnist

" The Economic Cycle Research Institute can justify a certain smugness now that business cycles are back in fashion."
--Harvard Business Review

“Shows... how far the state of the art in cycle forecasting has advanced, and how investors can profit from it.”
—Jon Markman, award-winning CNBC/MSN financial columnist 

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