Many new traders spend a lot of time looking for the holy grail of trading. The secret Gann angle, the right wave count, the perfect valuation model, etc. What we have found is that while a lot of new and even old traders spend countless hours searching for the holy grail very few, if any, successful traders have found it. Instead they figure out at some time or another that instead of a magical tool they should spend their time looking for useful tools that do a reasonable job of either lowering risk, increasing return, or increasing their hit rate.
One tool that we have found useful in looking out towards the future is that of the ECRI Weekly Leading Index. While by no means a holy grail it has historically done a fairly good job at forecasting stock market returns. As you can see in the chart below it has been very accurate over the past few years as it has led the SP500 by several months at important turning points. (Click on chart to enlarge)
SP500 Year Over Year % Change and ECRI WLI Growth Rate
So what is the WLI saying right now? Going along with our long held deflation thesis the WLI is now pointing towards slower growth in both the economy and particularly in the so-called “risk markets”. This of course matches what we are seeing in several other indicators and relationships that we follow. We have covered a few indicators in previous posts such as how junk spreads point to higher unemployment claims and how the PMI is pointing towards slower growth. In addition to these we are seeing many other signs such as the drop in commodities, take a look at the CRB Raw Materials Index, and in the rise of the US Dollar. Of course none of these are holy grails, just signposts in the fog.