Friday, December 10, 2010

ECRI's WLI & WLI Growth Rate Highest Since May

ECRI's WLI & WLI Growth Rate Continue 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 December 3, 2010
  • WLI  is 126.4 up from the prior week's revised lower reading of 125.3.  (Last week we reported WLI was 125.4)   This is the best reading for WLI since the week of May 14 when it stood at 127.0.
  • 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 14th consecutive week to minus 1.5% from minus 2.4% a week ago.  
  • This is the best reading for WLI growth since the week ending May 28, 2010 when it stood at positive 0.1%.
On November 30 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." 
Commenting on today's release, ECRI's Chief Operations Officer, Lakshman Achuthan said: "With both the WLI and its growth rate rising to their best readings since May, a “double dip” back into recession remains off the table, notwithstanding self-serving recession warnings that feed fear itself."
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 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.
Chart of WLI from 1973 to 2010
 Chart courtesy of ECRI
Notes: 
  1. The WLI for the week ending 12/10/10 will be released on 12/17/10
  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).  
  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 205%  vs. the S&P500 UP only 22% vs. NASDAQ  UP a only 19%   (All through 12/9/10)
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