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ECRI's Weekly Leading Index Has One Very Strong Correlation

October 12, 2012

by Doug Short

Last week I received an email from Pablo Corna, at Grupo A.J.Vierci in Paraguay, regarding the relationship between ECRI's Weekly Leading Indicator (WLI) and the S&P 500. How well ECRI's indicators correlate with recessions is a matter of strong debate. However, at least since the turn of the century, a smoothed year-over-year percent change of the WLI has shown a remarkably strong correlation with the S&P 500 monthly closes.

The chart below employs the same ECRI calculation I use in my weekly updates here, which is the year-over-year percent change in a four-week moving average of the index.

How strong is the correlation in the chart above? The Excel CORREL() function put it at an amazing 80.3%.