What is the NASDAQ ROC© ?
By Tim McMahon
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 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.
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.
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. Last month we added two big red question marks to indicate the similarity of the peaks and wondered if this could be the end of the rally? This month we have a sell signal.
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 index fell -1.58% on top of the -0.67% over the previous month and we still remain in sell territory. The annual rate of return has fallen from around 35% a year ago (35.97% November 2013) Dec. 34.67%, Jan. 35.62% and Feb. 35.33%) to 8.35% now.
Thirty-five percent annual returns are very nice but they can’t stay there forever. Returns began falling in March with a drop to the 33.37% annual return level. April fell to 23.22%, May was down to 18.12%. June rebounded to 25.64% and very near to another buy signal but July fell to 22.96%, August’s annual rate of return rose back to 25.55% but by September the annual rate of return was back down to 22.46% keeping it below the moving average and in October the return fell to 15.52% which is still a very good annual return but risk is running high.
Peak levels earlier in the year were higher than the final blow-off in 2007 (although lower than the peaks in 2004 and 2010 but they were the beginning of the rally peaks and these are end of rally peaks. The two red “?” symbols are there because the two patterns look eerily similar. The timing period is right for the end of a bull market. NYSE has issued a sell signal and now is not the time to get greedy.
Caution is still advised . We only get sell signals like this approximately every four years, so they shouldn’t be ignored. From the first peak sell signal in July of 1996 to the final Sell signal in April of 2000 was roughly 3 ½ years. The time from the first 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 4 years and 7 months ago, meaning that based on time alone we should be at the end of this whipsaw period. 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 6.5+ years later the NASDAQ is in the 4400’s with a 60.09% gain or about 9.1%/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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Presented by 30-year Market Veteran Adam Hewison