Definitive technicals as applied to the ECRI WLI

Am picking apart some definitive technical analysis as applied to one of arguably few reputable economic indicators, the ECRI Weekly Leading Index (WLI). Leaving aside all and any assessment of it's application to any purported economic reality, this exploration is purely technical analysis of the publicly available WLI data series, and provides a summary of where it sits amongst the myriad of purported recoveries or otherwise as regurgitated daily by the main stream media.

I cannot suggest if this data series has either a linear or power series (compounded, polynomial) relationship to the broader economic state of play, and merely present several methods of analysis that indicate the possibility that all is not what it seems.

Whole of data series linear regression showing +/- StdDev bands



The most obvious 2 observations are a) the rate of increases into 2007, broken by b) massive correction to the underside in 2008/09. This parallels with the observed outcomes of the GFC in 2008. Note however the WLI did not foresee the 06May2010 flash crash, yet the WLI responded to this event very abruptly. There is a 6 standard deviation correction to the March 2009 low, and we currently reside -3.5SD's under the linear regression average. Obviously a weak recovery to date.

Note that this data series started during a period of 8 years indicating economic stagnation from 1967 to 1975. This is fortuitous since it allows a direct comparison to what might be a similar period as indicated by the ECRI WLI currently in 2011, from the June 2007 high.

Same whole of series, added moving averages (short, medium and long term)

- moving averages most clearly show momentum, and comparison to previous trend movements

When analysing many instruments and asset trends, there is a distinctive increase in rates of change and cyclic volatility from 1996 onwards, attributable to a marked and definite increase in electronic analysis and trading, and easing of market access coupled with excitement and fervor over the technology sector. This euphoria would eventually end in the very public bursting of the dot.com bubble and reveal massive stock price manipulation in what was to become the new black in IPO's spinning and laddering. For this exercise, I am using the point that it last departed above the current linear regression average (being 1995) and using January 1995 so as to commence with a whole year.

Closeup of linear channels 1995 onwards


Applying some simple moving averages to the data series further highlights that we are yet to clear the obstacles of the GFC of 2008. As can be clearly seen in the following chart, with the addition of some Fibonacci levels

- showing major trend lines overlayed also

Combining some RSI and MACD analysis (not shown) of the ECRI WLI analysis, we can see a prevailing weakness in the forward movement of this Index indicating upwards direction being weak and limited, sideways trending being very likely and a possibility of a further decline into a dip and recovery within the next 12 months to Dec2012.

Low order dynamic bands applied to 1995 portion


CONCLUSION: Current situation indicates clearly we are still in a period of sustained weakness showing no immediate recovery. Momentum is negative (downwards)  while a rise is not impossible, it is merely rallying in a down trend (a bear rally). Confirmation of a clear break of this downward trend is an ECRI WLI reading above 125. I would mark a recovery to resumed growth as confirmed only above 129.

Using a Dec1971 value of 60, and applying 2% CAGR to the ECRI WLI, we project a value of 132.5 for Dec2011. Clearly we are below this. Given that we are also below linear regression of 138 by some 3.5 standard deviations, it does suggest that the universe is conspiring aginst mean reversion, and that upwards progress is imminent. Mean reversion and regression to trends are poetry when you are placed on the right side of the move.

Very simply, upwards is a good thing. It's a matter of getting it there, and keeping it there. Eventually further growth will become the most obvious certainty. But timing isn't everything, it is the only thing. The downside is that we are in a period fo 6-8 years that is sideways to down still. I respect the lucid and thorough Kyle Bass who suggests large corrections to housing markets last anywhere between 6-9 years. Using 6 years aligns with the previous history of the ECRI low in 1975, placing another  possible cyclic low still to come in Dec2012.

Hence I would put a floor of 120 not to break (must hold), and a ceiling of 129 that it needs to break (confirm recovery and growth) - buy the dip, sell the fade in the mean time.
Regards,