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The Economic Cycle Research Institute (ECRI), a New York-based independent forecasting group, released its latest readings for its proprietary Weekly Leading Index (WLI) yesterday.

For the week ending March 23, 2012:

  • WLI is at 125.9, up 0.5 from the prior week's revised reading of 125.4.
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth rose to 0.0%, up from last week's revised reading of negative 0.8%.
  • The lowest reading for WLI growth on record was -29.9% on December 5, 2008. It turned higher months before the stock market [S&P 500 (SPY)] bottomed on March 6, 2009, at 666.79.

Click to enlarge

WLI - 33-week high: It has not been this high, since August 5, 2011, when it was at 128.5.

WLI growth - 32-week high: This is the first WLI growth reading that has not been negative in 32 weeks, since its positive 1.1 for the week ending August 12, 2011.

See charts below for WLI and WLI growth vs. GDP Growth:

Two weeks ago, in an article "Why ECRI Stands By Their Recession Call", ECRI explained why it remains bearish on the US economy and continues to predict a recession.

Three weeks ago, ECRI’s Lakshman Achuthan said a recession should begin by mid-year 2012. He says revisions in the data might say a recession has already started, just like the last recession. If the recession is starting now, then the consensus should figure it out in about six months (August).

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 S&P 500 or its exchange traded fund, SPY. 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

Is the ECRI wrong?

How positive would WLI growth have to be for ECRI to say it was wrong? Does its model take into account the "presidential election cycle" where the sitting president will spend all he (or she) can to prevent a recession to get re-elected?

Note that the chart above of the S&P 500 vs. WLI shows a breakout of the S&P500 above the dashed blue line that represents the neckline for a "Head and Shoulders Bottom" pattern. This is a very bullish pattern. A pullback to this neckline during a global slowdown projected by ECRI would not invalidate the bullishness of this pattern, but it appears we already had a test of this support line from above last year and the market has moved on to new highs not see since early 2008.

I continue to believe caution is in order. I continue to take profits in equities as the market rises, so my "explore portfolio" is now up 10% YTD with "only" two-thirds in equities, with one-third in fixed income earning next to nothing this year. The higher-than-expected return for this allocation comes from taking advantage of the "investment opportunities" ECRI talks about, as well as increased alpha from individual stock selection.

Heeding ECRI's warnings and following the footsteps of Warren Buffett, CEO of Berkshire Hathaway Inc. (BRK.B), I think it is never wise to be "all in" the stock market with no cash cushion to buy corrections and bear markets. Likewise, anyone "all in" fixed income is probably losing out to inflation, unless all in TIPS (TIP).

Buffett's Berkshire Hathaway Inc. (Class A Shares (BRK.A), ended 2011 with $37.3 billion in cash on hand, which is 19% of its current $201 billion market cap (market cap data sourced from MSN and Yahoo!).

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 10, 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."
  4. SPY is the exchange traded fund for the S&P 500 Index.
Source: ECRI's WLI Rises To 33-Week High, Growth Rate No Longer Negative