Postscript to OECD CLI for January

David Rosenberg provides a brief “How to use the ECRI leading index for asset allocation” guide in this mornings Breakfast with Dave. For ease of reference, the following is the relevant bit, but you can always subscribe to his newsletters at Gluskin Shelf:

This is a handy indicator for asset allocation and sector rotation. For example, when the ECRI index is above zero and rising to a peak, as was the case from mid-June to October 2009, the S&P 500 is on average up 22%, led by basic materials, consumer discretionary, financials, industrials and technology.

In the quadrant we are in now, which is from the peak down to zero, the S&P 500, on average, rises 1.3% and leadership alters towards consumer staples, health care and telecom. On the cyclical side, industrials, energy, and tech still manage to outperform and do not relinquish that status until the ECRI index (smoothed) falls below the zero line. In bond-land, all anyone needs to know is that we are now in the ECRI quadrant where the yield curve flattens.

And while we are referencing how others use these leading indexes, click here to view the December article where we tested Albert Edward’s suggestion that Japan’s experience through the 90′s would be instructive with respect to leading indicators.