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On June 22 I wrote an article in Seeking Alpha entitled Leading Indicators, WLI, and SOX , whereby I pointed out the correlation between the SOX and the ECRI WLI. I noted that, as the WLI is a respected Leading Indicator and there was a clear correlation with the SOX, then the SOX should be more indicative of the state of the economy going forward instead of the DJIA.

A week later, on June 28, Howard L. Simons, President of Rosewood Trading, Inc., wrote about a correlation between the WLI and the S&P 500. He noted “the recent fit is suspiciously tight”.

More importantly he mirrored in his comments below the inferences in my article that the stock market itself is a valuable leading indicator of the state of the economy.

Where does this leave us? In an uncomfortable position, that’s where: If all of these indicators can be collapsed into the S&P 500, ol’ Mr. Flash-Crash himself, we're left wondering whether the stock market is a forecasting device.

click to enlarge image

But an interesting scenario presents itself. If the SOX and the S&P 500 correlate with the WLI, what data is the WLI using in its “proprietary” analysis. Could it be the stock market? And another poignant point – can the stock market really be considered a forecasting device (as the WLI is claimed to be by ECRI) – when the stock activity itself can be influenced by individuals with their finger on the buy or sell button, often doing so on rumor or fear. Look at the 300 point drop in the market on the 29th when a Citigroup report on China’s exports facing “strong headwinds” caused the market to go into a tailspin.

Ted Aronson, a partner at Aronson-Johnson-Ortiz in Philadelphia, summed it up best today when he said "I don't know what's going on. (The markets) are always interesting. But this is really wacky."

Is the stock market the type of Leading Indicator we really want to provide guidance in financial matters?

By the way, ECRI's Lakshman Achuthan never did call me regarding my article.

Disclosure: No positions

Source: Leading Indicators: WLI, SOX - and Now S&P 500