ECRI Growth Index

The ECRI Growth Index is painting a potentially dangerous view of the economic outlook.  Let’s take a look at the current reading:

ECRI Growth Index

Just as a disclaimer, this is unadjusted data.  The ECRI will update old data after the fact.  This is an economists view on indicators.  I do not and would never support adjusting past data.  Why?  Because I use these charts to train my brain so to speak to interpret the past to judge the future.  Much akin to Tom Brady watching old game tape to learn from the past, allowing him to make better decisions in the future

But if you adjust past data, you can’t adjust what your brain has learned.

So the tick lower here COULD BE the start of something bigger.  We’ve been looking for it, it’s a little earlier than I thought we’d see, but it makes a lot of sense that we’d begin to see this turn lower, meaning the overseas weakness is starting to infect us.  And the stock market is a leading indicator, so if it turns lower here, there will be a cascade effect lower.

Just be careful, always looking for a ‘crash’ or ‘black swan’ doesn’t make it more likely that there will be one.  They are such rare events, and with everyone aware of this situation in Europe, it’s hard to think we’ll see one right now…

But there are other clues.

What's The Individual Investor Doing With Their Money?

I showed this chart last week to my clients.  Without getting into its derivation here, it shows me what the individual investor is doing, versus the professional.  These spikes higher are normally signs we’re at a top…

Why?  Because it shows that the individual is becoming a bigger player in the market.  And they’re usually wrong…

So where does that leave us?

Interpreting future market direction is a process that I’ve likened to the old tv game show concentration where you are trying to solve a puzzle as individual pieces covering the puzzle are removed.  So each day, each hour, each minute give us a better view of the puzzle.  Sometimes the puzzle is easy to solve, sometimes more difficult.

We take daily data points from the market every day, and enter them into an algorithm that gives us the most likely future market direction.

We’re starting to see more bearish signs…

To learn more about the ECRI, click our ECRI WLI GROWTH page here.

To access our research, get our calls on the market, click here: stock market timing.

Regards,

Stock Barometer

Investment Research Group, Inc.

ECRI WLI UPDATE

4/16 – here’s another update, looking solely at the WLI (not the growth) and we just saw a tick lower – this is worth paying attention to:
ECRI WLI
And while you’re looking at that, notice this:
QQQ SPY RSI
Point is, markets are weakening, the Q’s are becoming relatively more weak, which is a bearish indication, look for a more sharp sell off to commence, very soon.
Interested in playing along with our indicators and learning how to trade them?  Click here.
3/26 – So far Lakshman’s call from a month ago (and beyond) is looking wrong.  Here’s the latedt on the ECRI WLI Growth Index:
ECRI WLI GROWTH
Growth is approaching the ZERO level and a continued break above it would be bullish.  Now the discussion below is that we’ve never not gone into a recession based on the leading indicators.  I’ll be very interested to see where these indicators are playing out in the weeks ahead.  With an election ahead of us, this could be very scary timing for a recession for the President.  So stay tuned…
2-28-12 Update – This chart below was what Lakshman Achuthan focused on during his Friday interviews as he defended the ECRI’s call that we’re still heading for recession – and it’s inevitable…
US Concident Index
Coincident Index is comprised of the following (numbers represent the normalizing factor)
  • 1 Employees on nonagricultural payrolls 0.5426
  • 2 Personal income less transfer payments 0.1890
  • 3 Industrial production 0.1493
  • 4 Manufacturing and trade sales 0.1191
As a matter of reference, these factors were revised effective on the release for April 2008, and all historical values were revised at this time to reflect the changes. (Under normal circumstances, updates to the leading index only incorporate revisions to data over the past six months.) The factors for the leading index were calculated using 1984-2006 as the sample period for measuring volatility. A separate set of factors for the 1959-1983 period is available upon request.
The US Coincident Index is at the lowest level in 21 months and at a level from which we have ALWAYS seen a recesion following…
It’s hard to imagine that with the stock market going up, that we could beheading into a recession, but the market and the economy are two different things, although somewhat tied.  As they say, the market has called 10 of 5 of the last recoveries…  So even the market as a economy forecasting tool is off.
What   Lakshman was postulating was that with all the central banks pumping liquidity into the economy, that money has to go somewhere.  However, the best measure of money changing hands is the velocity of money, which is significantly lower.
—————————————————————————
While the level of the ECRI has been bearish, it’s direction has been bullish and continues to climb.  But at this point, if you believe in levels and trends, we are at a critical point with the ECRI’s Weekly Leading Index, WLI.
Before I get into it, just a reminder that this is ‘unadjusted’ data.  The ECRI likes to modify previous releases for a few weeks, but to me, that’s just not right.  Sure, it’s what the government does with it’s data as they get revisions.  However, in this business of advising people what to do with their money, hindsight is the devil.  Make your call, and live with it.  Accordingly, I never go back and adjust the ECRI data.
Here is the ECRI WLI:
ECRI WLI
So as you can see, technically (if you believe in the potential for trends) the ECRI WLI Growth rate is at a key level and a turn lower here and we’ll be singing a different tune than we’ve sang all year so far.
So stay tuned…
Regards,
Stock Barometer
Investment Research Group, Inc.

ECRI WLI In Focus

On November 7th, CNBC conducted an interview with Lakshman Achuthan, ECRI Co Founder  & COO.  This interview was very interesting
to me, as someone who has been monitoring their weekly data for some time.

Update: To learn more on the ECRI WLI, see our previous post here.  To see the current update, scroll to the bottom of this post.

Last time Lakshman was on the show was at the end of September, and he predicted the economy would go into a recession.

A few days later (on 10/3) we issued a buy signal.  Since then, the market shot almost straight up.  Who’s right?

First of all, I’ve never considered economic reports as a good indicator of where the stock market will go and timing.  They’re two different animals.  But it brings up a point that I’ve been developing regarding the timing of indicators.

One reason I don’t like economic indicators, is that they’re for the most part, backwards looking numbers.  Now combine that with a stock market that’s supposed to be looking months ahead, and the two just don’t go together.

I want to showcase some of the comments made by Lakshman.

“Nothing has transpired since then (his September visit) to change their view that we’re going into an economic downturn.”

My only concern with that statement is that he’s looking at very recent data.  Here’s the ECRI WLI that he’s referencing.

One thing to note is that I don’t modify the past data.  Once they issue a number, it may be revised in the future.  I don’t think that’s the appropriate use of data, so I refuse to update their past data in my analysis.  It’s not a huge difference, and I’m sure they think it’s ok, since it’s in line with what occurs to other economic data, but in my mind, it’s cheating.

I would never consider going back and changing my past readings based on future revisions.  That’s hindsight and that’s never good!

Historically speaking, sure the growth rate is very low, but it’s also right where it was back in July of 2010, right before the market took off higher.   There is some correlation here, but big picture, if this indicator continues to the upside, we could be at just the same place we were back in July 2010 and see a move higher into the end of the year – consistent with my forecast.

Now I’ll admit, as developer of the Stock Barometer, which is another black box indicator that I use to trade, he has access to the components of the WLI and we do not and his statement that it’s a “Contagion among the forward looking indicators” that’s bringing us into recession.

He further supports the recession test with “In the past century, the vast majority of all recessions begun in a quarter that showed  positive gdp growth” countering comments about our currently low, but still positive GDP.

Another comment he made in reference to large financial institutions that were recently upping their GDP forecast, “The others look at models, that  are fitting the data, including gdp and retail sales to past patterns.   They’re good at now casting. “  Of course they are, because you have to trade  based on things that will move the market now!

If you took the position that the ECRI WLI was pricing in a recession, you would have missed this most recent move in the stock market.

Then he referenced “The Cockroach Theory”, which is a market theory that when you see one there’s likely to be more that you haven’t seen yet.  I’d argue that we can already see many cockroaches…

Other comments he made that I have somewhat of an issue with:

“In august of 2008, over 8 months into a recession, and wasn’t recognized until Lehmann hit us over the head.”  I’d argue that the market topped out well in advance of the crash.  In my mind, the stock market is the best forward looking economic indicator.

“Now you’re dealing with the psychology component of economics – where it is very difficult to know as a group how quickly we’re  going to recognize stuff”; ok, psychology and economics – I’m all about the psychology of the markets.  And believe the stock market is a better indicator than any economic report.

Here’s a chart of the ECRI Growth Rate.  While he was referencing the WLI – this view of growth is more of what he was considering.

Regards,

Stock Barometer

Investment Research Group, Inc.

Here’s our most recent update:

ECRI WLI

ECRI Index Chart

The ECRI Weekly Leading Index (WLI)

Click here to see our other update on the ECRI WLI.  It has our most recent update on the ECRI.

A large decline below zero in the ECRI Index Chart is said to be a leading indicator of a recession.  What’s it mean for the stock market?

WLI ECRI

As a professional trader and financial adviser to my clients, I am always studying every data set I can get my hands on.  This is one of them.

Data frequency is a big concern.  i.e. There are some data sets I can get every second of every day.  I use those for intra day trading.  There are some thata come out at the end of the day.  I use those for my daily adjustments.  And there are those, like this, that come out weekly.  I use those for big picture views on the stock market.

There is also data that comes out monthly.  I do not use any monthly data (except maybe looking at a monthly stock charts for historical perspectives).

The WLI  is updated every Friday with data through the previous week, making it is more responsive than the monthly Index of Leading Economic Indicators (LEI), originally developed by ECRI’s founder, Geoffrey H. Moore, for the U.S. Commerce Department.

One issue I have with this data is that when the ECRI issues updates to their data, they periodically revise the previous data set.  I do not allow adjustments in my collection of their data.  To me, a market timer, that’s not fair.  Hindsight is the enemy of the stock trader.  It’d be like me adjusting my indicators for the previous week and telling my clients that they should have heeded that signal – even though it wasn’t issued.  I am not sure why they do this.

Here are the various selling points from the ECRI’s site:

Frequency – the WLI is available every week, rather than monthly, allowing for closer monitoring of the U.S. economic cycle.

Promptness – the WLI is extremely prompt. Each Friday the WLI is updated through the previous Friday, i.e., there is only a one-week publication lag.

New composite index method – an improved method of composite index construction is used (Geoffrey Moore and Julius Shiskin developed the original LEI method). The result is a more clearly cyclical index with increased sensitivity at economic cycle turning points.

Revisions – only one component (money supply) out of seven is subject to significant revision.  Again, I don’t revise this in my view – and I’ve studied money flows, which may not be the same thing as money supply, but it’s not worthy of a revision.

Leads – the WLI has an average lead of 10 months at business cycle peaks and three months at business cycle troughs, which amounts to a longer overall lead than the LEI. Given its prompt availability, the WLI has an even longer effective lead at business cycle turning points, and would have historically signaled a typical recession about three months ahead of the LEI. In fact, the WLI has a longer effective lead than the LEI at 83% of business cycle peaks and 60% of business cycle troughs.

Conclusion?  You are better off looking at a chart of the stock market as a leading indicator of the economy, then paying attention to this indicator.  The stock market is the BEST indicator of future economic activity.  While the ECRI can take into account several data sets – the stock market takes into account ANY AND ALL influences that may be influencing the economy and weights them accordingly.