What is the NASDAQ ROC© ?
By Tim McMahon
The NASDAQ Rate of Change (ROC) chart is very helpful in getting the “big picture” view of the stock market quickly. The old saying “a picture is worth a thousand words” is very applicable to this chart.
Once you understand what it is showing you this chart will easily point out the direction of the NASDAQ stock market and make it easy for you to decide whether you want to be in or out (long or short) of the market. (See Below for Current NASDAQ Analysis)
(Click for Larger Image)
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.
Remember this chart shows the rate of return not the current price so it is much easier to see performance. Want to know if we are up or down from last year? Simple, if we are below the zero line… the NASDAQ is down, if we are above the zero line… the NASDAQ is up.
The key is to exit positions while we are in positive territory (with a gain above the line) rather than waiting until we have a loss. We simply exit, sit on the sidelines safely with our money intact and reenter when we get a buy signal.
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 volitile 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 issues a sell signal in October 2007 with the NYSE at 10,125. It confirmed in Jan 2008 with the NYSE at 9073 the market from there went on to fall to 5700 the following October giving you a full year of advance notice. The market bottomed in March 2009 at around 4800. The first Buy signal was generated at around 5800 in July 2009.
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?
Back in August 2012 the NASDAQ ROC index generated a buy signal and in September it posted a 5.34% gain. Our chart shows that we are in “whipsaw” territory and that is exactly what we got. In November the chart issued a sell signal and in December it was once again above the moving average back in buy territory. In February I said, “In typical whipsaw fashion we have another sell signal now.” But we moved back into Buy territory in May and the index moved up above 20% annual return with a pullback to 16.7% in September but them moved up sharply in October and November.
“Some caution is advised because we are closer to the end of the rally than the beginning.”
Caution: Watch for the next sell signal. From the sell signal in July of 1996 to the final Sell signal in April of 2000 was roughly 3 ½ years. The time from the sell signal in April 2004 until the final Sell signal in October 2007 was roughly 3 ½ years. Our first sell signal in June 2010 was 3 years and 3 months ago, meaning that based on time alone there is only 2 months left in this whipsaw period. And the next crossing below the red moving average should be our exit point! Note: The current upmove looks strong just like the final blow-off in 2007 and annual returns of an index above 35% are not sustainable.
Way back, in November of 2007 the NASDAQ was in the 2700′s and now 6 years later the NASDAQ is in the 3900′s with a 42% gain or about 7%/year. At this point the NASDAQ has done a good job of beating 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.
More Market Commentary:
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Stock Market Commentary on GOLD, Silver, S&P 500, US Dollar and Commodities by Adam Hewison. Every weekday at 1PM Adam shares his decades of trading and investing knowledge plus he even records weekly updates on Saturday to help you make sense of where the market is going.
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