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Friday, November 12, 2010

ECRI's WLI at 24-Week High - Bullish S&P500 Breakout

ECRI's WLI and WLI Growth Rate Move Higher
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 November 5, 2010
  • WLI  is 123.9, up from the prior week's revised reading of 123.1.  
  • The lowest reading for WLI this year was 120.4 for the week ending July 16.
  • Since apparently bottoming at -10.3 for the week of August 27,  WLI growth moved higher or was flat for the tenth consecutive week to minus 5.7% from minus 6.5% a week ago.  
  • The last positive reading for WLI growth was for the week ending May 28, 2010 when it stood at positive 0.1%.
Commenting on today's data, Lakshman Achuthan, managing director of ECRI, said "With the WLI steadily gaining ground since the summer and now hitting a 24-week high, the much-feared 'double dip' has turned out to be a mirage."
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 often get a clue for next week's WLI from the weekly change in the stock market.

Chart of S&P500 vs ECRI's WLI 
Note that the chart above of the S&P500 vs. WLI shows a breakout above the dashed green 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. 
I took some profits in Agilent (A charts and Quote) at $36.50 earlier this morning in both my personal account and my newsletter "explore portfolio."  I am looking at putting this cash back to work should the market correct to test that neckline breakout from above.
Chart of WLI from 1973 to 2010
 Chart courtesy of ECRI
  1. >The WLI for the week ending 11/2/10 will be released on 11/19/10.
  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).
Disclosure:  I am long  Agilent (A charts and Quote) and the exchange traded fund for the S&P500, SPY charts and quote, in my personal account and in the "Explore Portfolio" in  "Kirk Lindstrom's Investment Letter." 

KEY ECRI Articles:

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