Friday, March 04, 2011

ECRI's WLI Growth Rate at 42 Week High

The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, released its latest readings for its proprietary Weekly Leading Index (WLI) this morning.
For the week ending February 25, 2011:
  • WLI is 129.8 down from the prior week's reading of 130.5
  • Last week marked a 42 week high for WLI. Its last higher reading was for the week ending May 7, 2010, when it was at 132.1
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth of 6.5% is up from last week's reading of 6.1%
  • This marks a 42-week high for WLI Growth.
  • The lowest reading for WLI growth on record was -29.9% on December 5, 2008. It turned higher months before the stock market [S&P500 (SPY)] bottomed on March 6, 2009, at 666.79.
On February 13, 2011, Lakshman Achuthan, co-founder and Chief Operations Officer of ECRI was a guest on the national radio show "Moneytalk with Bob Brinker." During the interview with substitute hostess Lynn Jimenez, Mr Achuthan said now was the time to take risk because the economy will get better before it will get worse. He suggested listeners should "Look to take more risk now because we should boom before the next bust." and "get while the getting is good."

Chart of WLI and WLI growth vs GDP Growth
(Click charts to enlarge)

Since ECRI releases 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 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 its reading of its 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 2011

How to play ECRI's Signals: I own a lot of small cap stocks in my personal "explore portfolio" so I own SPY to get a more market weighting in this trading portfolio. If I wanted to recommend just one ETF to be long the market and take advantage of ECRI's outlook for an upturn in the business cycle, it would be the Total Stock Market Index (VTI Charts and quote), which has BOTH large and small cap stocks. I also own the total stock market index fund at Vanguard, (VTSMX) as part of my personal core portfolios. Vanguard discourages trading its index funds so VTI is the vehicle of choice for that.
Notes:

  1. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
  2. 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).
  3. For a better understanding of ECRI's indicators, read its book, "Beating the Business Cycle."

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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