USING THE ECRI AS AN INVESTMENT TOOL
2 June 2010 by Cullen Roche
7 Comments
Great tool here from David Rosenberg at Gluskin Sheff. As we note on a weekly basis the ECRI’s leading index has proven to be a fairly prescient market indicator. Mr. Rosenberg did the legwork for us and shows us how to utilize this tool in our investment plans. He broke down the historical market performance based on the ECRI’s varying phases. As noted last Friday, we are clearly in a Phase 3 slowdown according to the ECRI. Therefore, it can be expected that the S&P will remain volatile and likely underperform:
(Right click for larger image)
Source: Gluskin Sheff
CXO Advisory had the opposite conclusion on the usefullness on ECRI … comments?
http://www.cxoadvisory.com/economic-indicators/ecris-weekly-leading-index-and-the-stock-market/
So why is Rosie always bearish then?
Surely he can see his own charts?
john, i think rosie is always bearish because he writes what he sees, backed by economic theory. it seems that he is “always bearish” simply because the problems are fundamental and long term in nature. the problems inherent in this economy could have been seen in the data since 2005, 5 years ago. for most of us who start investing in their 30′s to 40′s with a horizon of 20 to 30 years, 5 years is a significant portion of our investment outlook. however, 5 years in terms of the us economy is relatively insignificant.
i think rather than try to see why he is always bearish, its more useful to understand his reasoning, born from said theory. from that standpoint and regardless of whether he is right or wrong, rosenberg is pretty good at what he does. keep in mind that economics and the markets is more of an art than a science. i like his approach at looking at the economy from a variety of perspectives via econ data, market signals and tells, and even anectodal evidence.
jt26,
i think the different conclusions arrive from time horizons. CXO looks at it from a statistical standpoint off of the weekly signal. given the relatively smaller time window, the correlations and statistical evidence explain little cause and effect. in essence, by this approach, cxo is using a blunt instrument to perform surgery. intuitively, we should know this since the stock market reacts to and is influenced by a myriad of factors such as earning surprises, daily economic data releases, company announcements, etc.
i think what rosenberg is concluding is that the ecri is a useful tool from a broader perspective. rather than using it as a weekly signal, he uses it as a means to signal changes in the bigger trend. hence, its more binomial in nature and is like an on and off switch. when the switch is off which is signaled by the sudden drop, the lights are down and declining growth is at hand. conversely, when the light switch is on, growth is on and the market can look to other factors to find its surgical precision in determining a price target.
that’s my read on it.
Sounds right to me on all fronts. I’d add to your comment above that Rosenberg takes a very long-term perspective on most trends. He has been bearish since the late 90′s with the belief that we’re in a secular bear. He’s been right, but he’s been impossible to trade off of….That’s really important to keep in mind when reading his stuff. He is NOT a trader.
I am unable to “Right click for larger image.” Is there some other way to make the image larger?
I also looked at Breakfast with Dave: Market Musings & Data Deciphering e-newsletters for June 1 & 2, but did not see the figure.
Try right-click, “save picture as…”, and save it to your desktop. This works.