ECRI's Growth Prediction Proves True

| About: SPDR S&P (SPY)
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.

For the week ending January 28, 2011

  • WLI is 128.9 up from the prior week's reading of 127.4
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth of 3.7% is up from last weeks reading of 3.5%
  • 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 ETF SPY) bottomed on March 6, 2009 at 666.79.
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.

Chart of WLI and WLI growth vs GDP Growth

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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

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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

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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 their book, "Beating the Business Cycle."

Disclosure: I am long SPY.