Friday, October 16, 2009

Is ECRI's Optimism Sign of an Impending Market Top?

The top-notch economic forecasters at the Economic Cycle Research Institute are human, as was discussed recently by Mish; to read his extensive and often-incisive comments, click HERE. ECRI's caution about the economy all through 2008, and their increasing concern beginning on or about early September, was useful to my investing. However, how useful is ECRI at extremes?

Here are some comments from ECRI in late February 2009 in WLI Remains Near Cyclical Low, as the bear market was within days of ending (though not at its bottom):

The annualized growth rate inched up to negative 24.0 percent from negative 24.5 percent. "While the WLI rose for the first time in six weeks, it still remains near its cyclical low," said Melinda Hubman, research associate at ECRI. "An economic recovery is not at hand," Hubman added. The weekly index rose due to lower interest rates and stronger housing activity, with the gauge partly offset by a decline in stock prices, Hubman said.

OK. "An economic recovery is not at hand." Implicit message to investors: don't buy. And, of course, said recovery was not "at hand". No criticism from yours truly. But if you bought then and help the SPY, you'd be up about 50% as of today. Similarly, if you bought in mid-late October and November 2008 based on plunging WLI and WLI growth rate and held till today, you would be up. You would have been down a lot temporarily, and all this is with perfect hindsight.

And, ECRI has pounded the table on the economy, and you can actually chart the upmove in its WLI growth rate and correlate it with the stock averages.

Where are we today?

ECRI says: US Recovery Poised to Trounce Any Obstacle
October 16, 2009
Reuters) - A weekly index of future U.S.economic growth edged down in the latest week, but its yearly growth rate rose to a new record high that further suggests signs of a tapering recession, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 128.1 in the week to Oct. 9 from an upwardly revised 129.1 the previous week, which was originally reported as 128.3.

But the index's yearly growth rate climbed to a fresh all-time high of 27.9 percent from 27.4 percent the prior week, which was revised higher from an original 26.1 percent.

The group's data has posted annualized economic growth at record high rates since September. Earlier this year, the growth rate was struggling to dig itself out of deeply negative territory.

"Such a pronounced, pervasive and persistent upswing in the WLI and its components assures that this economic recovery can overcome any obstacles in the months ahead," said ECRI Managing Director Lakshman Achuthan.

The report's yearly growth gains are in step with U.S. industrial production figures released earlier on Friday that suggest the third quarter closed out with surprisingly strong economic growth.

"IP numbers are very much in line with our April forecast that recession would end over the summer," said Achuthan, who has said chances of a double-dip recession are highly unlikely.

Meanwhile, the VIX collapsed under 21 today briefly, closing down 1.34% while the SPY closed down nearly 1%. As these indices normally move together, this is another negative divergence; another finger on the scale on the bear side.

Given that the certainty that the U. S. economy is mature, then exactly what the economy does for a quarter or two has little meaning in the context of stocks being valued at (say) 20 times their yearly earnings and 50 times their dividends, or 10-30 year bonds.

The public has shown extremes of optimism on standard measures for months, and this is a common phenomenon early in bull markets; and it is also standard for insiders to avoid buying. After all, they get nervous in depressions and bear markets, and they may not be rich with cash after the bear market. These facts are why certain seers have been short the market and wrong for months.

Meanwhile, stores are closing in the wealthy area in which I am renting a cottage, and the mid-range housing market is above the Fannie/Freddie conforming loan limit and remains weak. In the real world, I know almost no one who really cares about the stock market anymore as anything but a game, and the general feeling is "God Bless Bernanke" for saving the financial system.

The collapse in the VIX this month suggests that at the least, matters have moved beyond the successful speculative rally stage into the complacency stage. There are lots of profits to be taken in stocks that have gone up 3-7 times in 7 months.

The good news is that value stocks such as WMT, MCD, GSK and others are seeing rising prices.

The averages may or may not move much, but watch for rotation into the quality names that have seen little or no bull market since March. And

Copyright (C) Long Lake LLC 2009

1 comment:

  1. You may want to read/include ECRI's reply to Krugman/Mish (see "A Reply to Paul Krugman" on and, since you bring up buying and selling based on the weekly index, you may be interested in their note on, titled, "solid indicators are investor's best friend"

    Having said that, I'd agree that an exit strategy is a very good idea, but i'm waiting for ECRI before actually exiting (I know I can't time it right)