Updated March 14, 2017
Buy Signal Continues! But the Acceleration to the upside has peaked.
The NASDAQ index increased 1.76% since last month on top of 3.6% last month and 2.18% the previous month. So the rate of increase is down. Annual returns are 23% but this is down from February’s whopping 27% above year prior levels. It remains well above its moving average thus maintaining a buy signal, but it has turned down.
Last month I said, “however this is getting toward “nosebleed” territory so caution should be observed. Typically after a move below the zero line the ROC will spike up. Occasionally as high as 60% if the previous crash was large. The last one was not. The key is that it cannot maintain that rate forever it is mostly just regaining what it lost. But if it can stay above the zero line we can often see a year or two of 10-20% returns. This up-move looks similar to the one in 1995 so if the pattern continues we could see double digit returns for several more years.”
As we’ve seen before a spike from below zero can peak quickly and then generate a “sell signal” but it can stay in “whipsaw territory” for a while and this period can still generate healthy returns for quite some time.
The green and red “X’s” indicate where the NASDAQ ROC crosses above and below the zero line respectively. From the first green “X” in March of 1995 to the final Sell signal in April of 2000 was roughly 5 years (although there was a minor cross in October 1998 which probably should have been the end of the bull if it weren’t for FED intervention).
The time from the 2nd Buy signal in June 2003 until the final Sell signal in October 2007 was roughly 4.3 years. The next green signal was in October 2009 followed by a red in January 2016, so it was 6.5 years. The period below zero (i.e. from January 2016 – August 2016 was short-lived similar to 1995.
At the moment we have a buy signal coming from below the zero line looking very similar to the situation in 1995. This could result in a very nice up move. We need to take it seriously since buy signals like this don’t occur very often.
See the NYSE ROC for more information about average gain and duration for major bull markets.
Way back, in November of 2007 the NASDAQ was in the 2700’s and now 9 years and 2 months later the NASDAQ is above 5550 resulting in a more than 100% gain or about 11%/year. At this point, the NASDAQ has done a good job of beating the NYSE and the inflation rate. But if you can avoid the downs and be safely in cash and then reenter for the up periods you can do much better. Of course, that is the whole purpose of the ROC charts. Looking at more recent history… The NASDAQ started 2011 in the 2700’s once again and fell to the 2300’s by August then rose to the 3000’s level before falling back and then rising to current levels. See our article Stock Trends by Month to see which months typically perform best and which perform worst.
The NASDAQ Rate of Change (ROC) chart like the NYSE ROC is helpful in determining the direction of the stock market quickly.
Once you understand it, you can easily see the direction of the NASDAQ stock market and easily decide whether you want to be in or out (long or short) of the market.
(See Above for Current NASDAQ Analysis)
The NASDAQ Rate of Change (ROC) chart shows the annual rate of return of the NASDAQ market along the left axis and the years since 1990 along the bottom.
Just like our NYSE Rate of Change chart it shows the rate of return, not the current price. The nice thing is that it makes it so much easier to see performance. It is just a matter of whether the index is above or below the zero line… the NASDAQ is up if we are above the zero line… and the NASDAQ is down if we are below.
Of course, you want to exit positions while we are in positive territory (with a gain above the line) rather than waiting until you have a loss. We simply exit, sit on the sidelines safely with our money intact and reenter when we get a buy signal. Due to investor psychology, this is difficult to do. See : Why Investors Cling to Hope Amid Stock Market Turmoil and Improving Your Investments with Decision Theory for reasons why this is so.
About the Chart
The red line is the 12-month moving average. As with most moving averages, a buy signal is generated as the index crosses above the moving average and a sell signal is generated as the index crosses below the moving average. (See Current Analysis Below)
Another helpful way to use this chart is to look at the slope of the red moving average line. If the slope is down the market is trending down (annual gains are getting smaller) if the slope is up the market is moving up (gains are increasing). And obviously, if the line is basically flat the market is not trending at all. It is generating a steady return. If this steady return is positive the market performing well and a nice flat steady return is preferable to a volatile market that may cause you to panic and sell at a loss.
Just because this chart is not moving higher does not mean we should sell. In the period from June 2004 – June 2007 the red moving average line was basically flat, although it had a bit of wiggle, but it was still flat at around 10% rate of return so holding during that period would have produced returns very close to the long-term average.
If you are looking for big gains, the best buy signals come from a movement from below the 0% line. This allows you to capture the greatest up move.
The Chart issued a sell signal in October 2007 with the NASDAQ at 2764 subsequently the NASDAQ fell to around 1480. A buy signal was issued at 1796 almost 1000 points below where the sell signal was generated.
Note: While viewing this chart we must remember that it represents the rate of return we would have earned if we had been holding the entire NASDAQ for the previous 12 months. This can be achieved through the use of an index fund or ETF.
You might also be interested in the correlation between inflation and the stock market ? How does decade inflation and stock market returns compare?
The following video by INO President Adam Hewison gives specific current commentary on a variety of markets including Gold, Silver, the Dow and the Dollar. It is updated Daily at 1:00pm est. Just Click to watch. Mouse-over to find a button to expand to full-screen. Mouse-over full screen to find “shrink” button.
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Presented by 30-year Market Veteran Adam Hewison