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On Friday, September 7, 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 16-week high while its growth rate rose to an 52-week high.

For the week ending August 31, 2012:

  • WLI rose to 123.7, up from the prior week's revised reading of 123.5.
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth rose to POSITIVE 1.0%, up from last week's revised reading of positive 0.5%.
  • 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.

Chart 1


(Click to enlarge)

Annual WLI growth: A year ago, for the week ending on September 2, 2011, WLI stood at 123.2, so WLI's growth rate is a positive 0.5% on an annualized basis. Thus year-over-year growth of WLI stands now at a 52-week high.

The next chart below shows ECRI's reported WLI growth rate, which is derived from a four-week moving average.

Chart 2



(Click to enlarge)

ECRI's Recession Call

Eleven months have elapsed since I reported ECRI had called for a new recession in ECRI Recession Call. The U.S. has yet to have a recession, much less a quarter of negative GDP growth. ECRI thought revisions would show we are already in a recession, but the latest revision to Q2 GDP was to revise it higher by 0.2% to 1.7%.

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 September, 30, 2011, 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.

Since recommending SPY to my readers, it made a new all-time high when you adjust for reinvested dividends as shown in this next chart.

Chart 3 Showing SPY Adjusted for Reinvested Dividends.
(Click to enlarge)

With SPY today at a new all time high, with dividends reinvested, 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 4: 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.)

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 S&P 500 is up 2.1% for the week with SPY at $144.15 vs. $141.60 the prior week, so this will help WLI move higher next week.

With ECRI's WLI growth now positive and moving higher for two consecutive weeks, will ECRI 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 1.7% GDP number and show a significant recession. ECRI didn't think there was anything anyone could do to avert a recession but perhaps they didn't know Ben Bernanke had such a large helicopter to throw money from at the economy.

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.
  5. VTI is Vanguard's "Total Stock Market" exchange traded fund.
  6. 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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: ECRI WLI Growth At 1 Year High; SPY At New All Time High