On Friday, August 17, 2012, the Economic Cycle Research Institute (ECRI), a New York-based independent forecasting group, released its latest readings for its proprietary Weekly Leading Index (WLI). In the latest release, ECRI's WLI rose to a four-week high while its growth rate rose to an eleven-week high.
For the week ending August 10, 2012:
- WLI rose to 122.8, up from the prior week's reading of 122.5.
- The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
- WLI growth rose to negative 0.6%, up from last week's reading of negative 1.1%.
- The lowest reading for WLI growth on record was -29.9% on Dec. 5, 2008. It turned higher months before the stock market bottomed on March 6, 2009, at 666.79.
- Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
Annual WLI growth: A year ago, on August 10, 2011, WLI stood at 124.9, so WLI's growth rate is up to -1.7% on an annualized basis. This marks a 41-week high for the year-over-year growth rate for WLI!
The next chart below shows ECRI's reported WLI growth rate, which is derived from a four-week moving average.
ECRI's Recession Call
Almost eleven months have elapsed since I reported ECRI had called for a new recession in ECRI Recession Call. I don't want to sound like an apologist for ECRI, but I don't hold their call for an "official" recession that has yet to appear because they were right in what mattered to me, a slowing in economic activity when others (the Fed, The Obama administration, etc.) were saying the economy would recover in the next year.
Here is how I found value in what ECRI predicted about the direction of the economy:
Three days after I posted news of ECRI's recession call, on September 30, 2011, I posted an article here on Seeking Alpha titled ECRI's Weekly Leading Index Falls: Jobs To Get Worse Under Recession-Bound U.S. Economy. In that article I said I owned SPY and would take some profits if the market rallied. I had just increased my newsletter "explore portfolio" SPY position from 85 shares to 209 shares with buys at $125.75 and $117.00 in August 2011.
On 9/30/11, the S&P 500 was at $1,146.
I told my readers to take profits in SPY twice after ECRI's call for a business cycle slowdown. First I took profits by selling the shares bought at $117 when they gained $10. Then I took more profits by selling half the shares bought at $125.75 when they reached $134. With 20:20 hindsight, I should have waited for $140s, but I was being conservative with ECRI's recession call and clear belief that we would see an economic slowdown at a minimum.
Notice on my chart above I show ECRI's WLI and WLI growth appeared to be bottoming in June. Using some other technical indicators, such as my DOW CLX model, I told my readers I was adding 40 shares of SPY to my explore portfolio at $127.50 on June 4, 2012. I've held on to these as all three measures of WLI appear to be in an uptrend. With SPY now $142.18, I am keeping my eye on WLI for any clues of a change of direction as well as change in my DOW CLX Mojo Graph from bullish to bearish.
Does SPY Lead WLI or Does WLI Lead SPY?
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. But this is not always the case. Specifically, in the lead up to the last two recessions, the WLI turned down months before the stock market did. Is WLI predicting higher prices for SPY in the weeks ahead?
Chart 3: S&P 500 vs. ECRI's WLI (click to enlarge)
(Note, I would plot SPY vs. WLI, but I don't have the data in my spreadsheet going back as far since I only started trading SPY in early 2007.)
I know many writers who have remained bullish on SPY since 2007 who have nothing to show for it as dividends reinvested have just about made up for losses. With the aid of ECRI's WLI and some of my other technical indicators and my method of Using Asset Allocation to make money in a Flat Market, I am up 35% with SPY trades since my first buy in 2007 for my personal account at $143. (My lowest buy was $79.86 on 2/17/09 and I still hold shares bought in a taxable account at $87.54 on 10/10/08.)
Over the next 10 years, I expect the S&P 500 will keep up with inflation and the dividend it pays should grow with or even exceed inflation. An added benefit to owning equities is that the dividends and capital gains currently get favorable tax treatment. Finally, treasury rates are artificially low (see Current U.S. Treasury Rates At A Glance) giving all bond funds significant interest rate risk.
I was asked in my Facebook group Investing for the Long Term why I own SPY: "I'm confused; if the ECRI is projecting a recession, why are you long SPY? Is it a market timing strategy?" My answer was:
I don't believe in 'all or nothing' market timing. I explain it more in my newsletter, but I'll adjust my allocation to stocks based on many things including ECRI's outlook. My last two moves for SPY was to sell SOME shares earlier this year when higher and buy them back on June 4, 2012 at $127.50 using 'Auto Buy and Sell targets' in my monthly newsletter. Hope that helps. (Seeking Alpha requires its writers to disclose if we hold a position. Thus, I would report I was long SPY even if SPY was only 1% of the portfolio with the other 99% in cash.)
What Does The Future Hold?
At the time of this writing, the market is up 1.0% for the week with SPY at $142.18 vs. $140.84 the prior week, so this will help WLI move higher next week.
It is quite possible that ECRI's WLI growth could turn positive soon and ECRI would have to call for an upturn in the business cycle without their predicted recession occurring. Given that deficit spending is adding about 6% to GDP, 2012 Budget Deficit Approaches $1T, I won't hold it against them if we do not get an "official recession." Obviously, when we cut spending today to match receipts, we'd subtract about 6% from the positive 1.5% GDP number and show a significant recession.
I have certain rules I live by. My first rule: I don't believe anything the government tells me.
-- George Carlin in the 1992 HBO special "Jammin' in New York"
SPY at $142.30, according to Seeking Alpha, has a ttm yield of 1.94% and it is up 13.3% YTD. BND, the Vanguard Total Bond Market ETF, has a yield of 2.67%, but it is only up 0.8% YTD. If stocks continue to rally and bond funds actually lose money as interest rates climb, small investors could finally abandon bond funds as they learn bonds are not the "safe investments" they thought.
Finally, the bullish inverted head and shoulders bottom breakout pattern I wrote about in 2010 is still in effect today. I show the dashed green neckline plus the head and two shoulders in my Chart 3 above. Notice how that neckline was tested from above, another very bullish development. The dashed red neckline on Chart 3 shows the head-and-shoulders top plus a test from below of the neckline before the S&P 500 fell to 666 in 2009.
- Occasionally, the WLI level and growth rate can move in different directions because the latter is derived from a four-week moving average.
- 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).
- For a better understanding of ECRI's indicators, read its book, "Beating the Business Cycle."
- SPY is the exchange traded fund for the S&P 500 Index.
- VTI is Vanguard's "Total Stock Market" exchange traded fund.
- VOO is Vanguard's new exchange traded fund that tracks the S&P 500 Index. It is a lower cost alternative to SPY. I own and write about SPY, as I have many years of data for it, but VOO could do slightly better than SPY over time because it has a lower expense ratio.
Disclosure: I am long SPY and own the traditional index fund versions of VTI and VOO bought long ago in various taxable and tax deferred accounts.
Disclosure: I am long SPY.