What is the NYSE Rate of Change (ROC)©?
The NYSE Rate of Change (ROC) chart is helpful in getting the “big picture” of the stock market very quickly. The old saying “a picture is worth a thousand words” is very applicable to this chart. Once you understand how to read the ROC chart you can easily spot the direction of the market which makes it easy for you to know whether you want to be invested in the market or not. (See Below for Current NYSE Analysis)
The NYSE Rate of Change (ROC) chart shows the annual rate of return along the left axis and the years since 1990 along the bottom.
Since this chart shows the rate of return rather than the current price it is much easier to see performance, we don’t have to guess if we are up or down from last year. If we are below the zero line… we are down, if we are above the zero line… we are up. The key is to exit positions while we are in positive territory (with a gain) so we can avoid the loss and then we can 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 (gains are getting smaller) if the slope is up the market is moving up (gains are getting bigger). And obviously if the line is basically flat the market is not trending at all. But a flat line at say the 10% level is not bad it means the market is gaining a steady 10% a year which would be very good.
Just because this chart is not moving higher does not mean we should sell. In the period from May 2005 – May 2007 the red moving average line was basically flat, although it had a bit of wiggle, but it was still flat at around 12% rate of return so holding during that period would have produced returns above the long term average.
If you are a short-term trader or simply 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.
Note: While viewing this chart we must remember that it represents the rate of return we would have earned if we had invested in the entire NYSE for the previous 12 months. Which can be achieved through the use of an index fund. Is there a correlation between inflation and the stock market ? This chart compares decade inflation and stock market returns during the decade.
Current NYSE Analysis:
In August 2012 the NYSE ROC generated a definite buy signal, not quite as dramatic as the one in 2009 but a good buy signal none-the-less. And the rate of return shot up considerably. Then the rate of return bounced around above 10% coming close to the moving average but not crossing below. In the Summer of 2013, FED chairman Bernanke spooked the markets with his talk of backing off the accelerator but then he decided to take it back, so the markets picked up again. Up until September 2013, the red moving average line remained above the zero line and the index remained above the moving average.
But in September, possibly out of concern over what would happen when Bernanke retired, the black line crossed below the moving average generating a sell signal. At that point, we asked, “Is this “the sell signal” that signals the end of the bull market? Or will it just be another whipsaw?” We said, “Only time will tell, we are at the end of the summer and the market may be picking back up again for the winter months.” In October, it seemed that the market had accepted that the new FED chairman Yellen will continue on the easy money path so the market picked up again moving the NYSE once again in buy territory. Then for the next month, the market went basically nowhere so the annual rate of return dropped from 25.8% to 20.23%. But a 20% annual return is still excellent. But I said, “it is generally unsustainable and high returns like that generally indicate overbought conditions and the making of a bubble.”
What’s happening now:
In February, the rate of return line crossed below its moving average generating a sell signal at around 10,250. And I said, “Of course this could be the tail end of the January slump and we could get another whipsaw upward (which is highly likely) but we have received an early warning alert and we need to be cautious at this point.” Since then the Ukraine issue has caused some concern in the market and we remain in sell territory. Two months later the market has suffered some bad down days and some rebounds today the market stands roughly 100 points above where it was when the sell signal was generated We will stand safely aside until another buy signal is generated.
Also see the Inflation Adjusted NYSE Stock Index – how has the NYSE fared when inflation is taken into consideraton?
For more information see: NASDAQ Rate of Change
Tim McMahon, Editor
Financial Trend Forecaster
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