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.
Current NYSE-ROC Analysis:
The NYSE took a series of tumbles from August 2015 through the February 11th bottom at 9029.88. But from that bottom we have seen a bit of a rebound which the media is taking as the sign of a new bull market. However, at this point although the NYSE index is above its 200 day moving average the ROC has not crossed above its moving average yet and the index is actually 27 points below where it was a month ago.
Click for larger Image
The Current NYSE Chart
Looking at the 2 year chart we can see a steady decline (lower peaks) from May 21, 2015 through February 2016 then the index broke above the resistance line of the downward channel. Last month we said, “There is still some resistance at the December 1st peak and at the November 3rd peak. So if it breaks through those it may also generate a ROC buy signal.” What happened was that it broke through the December level but was stopped by the November level. From there it has turned back down and we will have to wait and see if it tries to test the November level again.
Back in May of 2015 (a full year ago) the market peaked at 11,239.66. The drop on February 11th took the NYSE back down to support levels bottoming at 9029.88 for a 2,209.78 point drop. This is a nine month 19.66% “correction”. This is in the range of an average correction, so we can hope that we break above the November resistance and then the previous high, if we don’t we could get another major catastrophe like 2007.
Inflation Adjusted NYSE
Although the NYSE appears to be making new highs every few years, but, if you look at the Inflation adjusted returns on the NYSE you will get an entirely different picture. When we adjust for the depreciating value of the dollar we find that the NYSE has not made new highs in recent years and the actual peak was in 2007. See Inflation Adjusted NYSE for more information.
The chart below by Chart of the Day considers a 30% sell-off the end of a “Bull Market” so if that is the case we are only part-way there. While the second chart considers the results of a smaller 15% decline.
Length of Stock Market Rallies
Our friends at Chart of the Day have published several charts on the length and magnitude of rallies over the years. This chart of the Dow rallies since 1900 was published on May 21, 2015.
As you can see the Dow performance is not spectacular and there are only 5 of the 13 rallies that lasted longer so we could easily be nearing the end of the rally. Dow is made up of “cherry picked stocks” so it doesn’t really represent the overall market. The Dow peaked at 182.93 on May 19th 2015 and bottomed at 156.49 on August 25th 2015 and again at 156.80 on February 11th. The August bottom was a decline of 14.45% from the peak so it has not yet reached the “15%” decline level depicted in this chart.
The following chart of the S&P 500 was published on September 3, 2014 so the rally has now lasted another year and 5 months longer although as we said the market hasn’t gone anywhere during that period. So we are simply closer to the 1962 rally point.
When you first look at it you might think, “Oh well this rally is only about half way to the max based on both magnitude and duration. It is less than average… so it has a long way to go.” But does it?
The chart plots “major rallies” since 1932 i.e. an average of one every 3.7 years. In this case, a major rally is defined as an advance of 30% or more that follows a 15% or greater decline. There have been 23 major rallies using this definition during this period. The current rally began with the 2011 correction of 19.4% and started counting at the September 2011 low of 6770.73. From there through May 2015 the market has increased about 66% up slightly from the 62% it registered in this chart so the only difference is a sliding toward the right another 350+ trading days but still below the 2002 rally. By looking at the chart we can see that the current rally was a bit anemic in that it is below the linear regression average line but lasted a bit longer than average. But with the current 19% correction using the 15% guideline we can mark this rally finished by this definition.
Back in May 2014 Chart of the Day published the following chart (once again of the DOW) with slightly different parameters. In this one, the rallies followed a decline of 30% or more (rather than only 15% in the above chart). So in this chart the rally began after the 2008 crash and the 2011 drop was just a “correction”. Looking at it this way there are fewer points of reference (only 13) and since this chart was created we have moved a bit closer to the average point on this chart.
NYSE Rate of Change (ROC) History:
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 was trending up 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. Unfortunately, 20% is generally unsustainable and high returns like that generally indicate overbought conditions and the making of a bubble.”
In February 2014, 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 one thing after another has caused the market concern and we remained in sell territory.
On our ROC chart in November 2013, it was traveling at a “speed” of over 25% per year. It dropped to 20%, then 19%, 16%, 14.5%, 14% and by May 2014 it was at 11.57%. June kicked the annual rate of return back up to 16.58% but by July the annual rate of return had dropped off a bit to 15.48%. By July 2015 the annual rate of return neared zero 0.32% and in August 2015 the NYSE was below year earlier levels at -1.25%. From there every month was below the previous year… September -7.96%, October -0.26%, November -7.07%, December -6.99%, January -11.54% and February -13.77%.
Is there a correlation between inflation and the stock market ? This chart compares decade inflation and stock market returns during the decade. Also see the Inflation Adjusted NYSE Stock Index – how has the NYSE fared when inflation is taken into consideration?
For more information see: NASDAQ Rate of Change
Tim McMahon, Editor
Financial Trend Forecaster
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