SPY 8% Off Record High While WLI Rises To 6-Week High

Includes: SPY, VOO, VTI
by: Kirk Lindstrom


Currently the S&P500 at 1,951.67 is 8.4% below its record high of 2,130.82.

SPY at $194.50 is 8.3% below its dividend adjusted record high of 212.08.

GDP was 3.9% in Q2 of 2015 and ECRI’s WLI suggests Q3 GDP will be lower.

ECRI’s WLI rose to a 6-week high suggesting a recession is not on the horizon, yet.

The markets (Table 1) are currently all well off their record highs with the S&P500 down the least from its recent record high. The S&P500 was down as much as 12.8% on an intraday basis (Chart 1) in August and appears to be testing this low now. With ECRI's WLI appearing to stabilize then move to a 6-week high, it appears the US economy is not in danger of a recession in the next six months which could help the markets stabilize and move higher after working through the current issues.

Table 1: Market Comparison

Chart 1: S&P500 Intraday values

Table 2

Chart 2 Showing S&P500 from 1997 through September 25, 2015

S&P500 Chart Scan

Despite the current weakness, the S&P500 is over 23% above its 2007 high. The stock market bears who claimed we were in a "Secular Bear Market that began in March 2000" scared many out of the stock market. Many recent articles say many investors still remain out of the stock markets. Those of us who stayed in the markets and added to positions during the downturns are well above past highs.

Table 3

In my February 2011 article "How to Play Expected Inflation from the TIPS Spread," I wrote I was long SPY (at $133.11) as one way to benefit from expected inflation. "I also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P 500, for both inflation protection and income."

With SPY up 46%, not counting dividends, since that article I have been correct to recommend SPY here on Seeking Alpha for the past few years.

Table 4: SPY since 2/11/11 without Including Reinvested Dividends:

Currently, SPY adjusted for dividends is 93% above its 2000 high with dividends reinvested. The raw price index for SPY, without dividends and shown in green on my graph below, also remains far above prior highs made in 2000 and 2007.

Table 5: SPY since Bull Market Highs Including Reinvested Dividends:

Chart 3 Showing SPY Adjusted for Reinvested Dividends.

SPY Chart Scan

Today Friday September 25, 2015, the Economic Cycle Research Institute (ECRI), a New York-based independent forecasting group, released via email its latest readings for its proprietary Weekly Leading Index (WLI) for the period ending during the prior week. In the latest release, for the week ending September 18, 2015:

  1. WLI was 132.1, up compared with the prior week at 131.1. This was the highest reading in 6 weeks since August 7, 2015 when it was last 132.2
  2. The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  3. WLI growth rose to a negative 1.9% compared with the prior week of negative 3.0%. This is the least negative reading in 3 weeks when it was negative 1.8% on August 28, 2015.
  4. The lowest reading for WLI growth on record was negative 29.9% on Dec. 5, 2008. It turned higher months before the stock market bottomed on March 6, 2009, at 666.79.
  5. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.

Chart 4

Annual WLI growth: Based on a simple, year-over-year annualized basis, the annual change in WLI was a negative 1.9%, up from the prior week's reading of negative 3.0%.

Chart 5

GDP Outlook:

The rise of WLI and WLI growth in Chart 5 above correctly preceded the Q2-2015 GDP results showing growth over Q1-2015. With the significant decline in WLI and WLI growth, I expect Q3 GDP will be lower than Q2. I do not expect a recession as both WLI and WLI growth remain well above their 2010 and 2011 values where the economy was weak but avoided a recession.

In a May 9, 2014 article "Where Are We in Economic Cycle?" ECRI warns that sustained 3% GDP growth will remain difficult while their belief of 2% would be what the Fed calls the "stall speed."

While the consensus keeps predicting an economy at "escape velocity," with sustained 3%-plus growth, the reality remains far short of that, with yoy GDP growth hovering around 2% - what one quickly-forgotten Fed paper had called the economy's "stall speed." Meanwhile, business investment remains elusive and - as ECRI correctly predicted last summer - construction is decelerating, not accelerating, posing risks to the economy now highlighted by Janet Yellen…
There's no indication that this era will end soon, even if we see occasional 3%-plus GDP growth quarters, given that even Japan in its "lost decades" has seen 3%-plus GDP growth in 30% of the quarters since 1990.

Chart 6: S&P 500 vs. ECRI's WLI Growth Rate

(Note, I would plot SPY vs. WLI, but I don't have the weekly 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 as this screen shot shows.

Chart 7: Screen Shot from "Rates at a Glance"

Back in 2012, when ECRI was predicting a recession, I was asked in my "Investing for the Long Term" Facebook group why I owned 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.)


  1. 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.
  2. I trade SPY around a core position in my newsletter's "Explore Portfolio" and with my personal account. With dividends reinvested, my explore portfolio currently holds 137.202 shares of SPY with a "break-even" price of $99.33. I also have the index fund version of SPY in both my newsletter's "core" portfolios.
  3. 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).
  4. For a better understanding of ECRI's indicators, read its book, "Beating the Business Cycle."
  5. SPY is the exchange traded fund for the S&P 500 Index.
  6. VTI is Vanguard's "Total Stock Market" exchange traded fund. If you want to invest in a single fund, that is my first choice over SPY. I recommend SPY and several others in my core portfolios for more opportunities to rebalance.
  7. S&P500 Chart Scan & SPY Chart Scan

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.

Disclosure: I am/we are long SPY.

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.