Thursday, March 8, 2012

Beta testing the Shadow Weekly Leading Index (week 9)

- by New Deal democrat

I haven't updated the Shadow Weekly Leading Index in a few weeks, but during that time ECRI's WLI has generally continued positive, and its yearly Growth index is within shouting distance of turning positive.

To recap, the Shadow Weekly Leading Index is an unweighted version of the presumed components of the ECRI weekly leading index. Research has revealed that the WLI (per Lakshman Achuthan) has 7 components. We know that two are initial jobless claims and the JoC-ECRI commodity index. Based on weeks 1 through 5, it appears that ECRI gives extra weight to commodity prices and secondarily to credit spreads. Here are the presumed components of the WLI as they fared last week:

The JoC ECRI Index rose from 127.52 to 128.12 +0.5%
Credit spreads* declined from 3.14 to 3.11 -0.1%
MBA Purchase Mortgage Applications rose 2.1% on a seasonally adjusted basis
Wbaa bond yields* fell from 5.15 to 5.08 -1.4%
The S&P 500 rose +0.3% last week.
Initial Jobless Claims +3.0%
Real M2

Every single one of the above is a positive for the index.

So far, this week the unweighted average change is +0.9%. Barring a very, very bad number in either weekly jobless claims or money supply, it appears that there is going to be a solid advance in ECRI's WLI when it is reported tomorrow - especially if commodity prices and credit spreads are the most heavily weighted components.

Others have calculated that the WLI growth index appears to be a function of comparing the last 4 weeks' average with the 52 week average. Since the last 4 weeks have featured continued advances in the weekly index, and the 52 week average is a decline, this suggests another strong advance in the growth index, moving it substantially closer to positive territory.

We'll see tomorrow.