NYSE Rate of Change (ROC)©

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)

NYSE rate of change chart

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:

Another month goes by and still no buy signal. The current leveling of the market has allowed the ROC to stay below its moving average and not generate a buy signal even though it looked like it should. This is another bearish signal and indicates caution is still warranted.

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, 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 and Iraq have caused some concern in the market and we remain in sell territory. Four months later the market has suffered some bad down days but still actually made new highs.

On our ROC chart back in November it was traveling at a “speed” of over 25% per year. It dropped to 20%, then 19%, 16%, 14.5%, 14% and in May it was at 11.5%. 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%. All of these are good rates of return but are they worth risking a 30% drop in the value of your holdings?

The red moving average has turned down. The Volatility Index (VIX) is historically low indicating complacency in the market. No one is worried… the FED will save the day. The problem is that as market participants become more and more complacent the risk of a “Black Swan” event happening becomes greater and greater. So the possibility of a market crash is actually increasing due to the FED’s actions.

Chart of the Day published the following chart a couple of months ago: Since then we have moved to the right slightly and up a bit less. So we are still very close to the middle of the line putting us closer to the duration of the 1907 and 1921 rallies, making the possibility of an end even closer.

Stock Market Rallies

When you first look at it you might think oh well this rally is only less than half way to the max based on both time and duration. It is less than average… so it has a long way to go. But does it?

First of all the one outlier was the Wartime rally of 1942 when the market moved from the depression era up a magnitude of ten-fold.  If we exclude that one the average will move significantly closer to our current point. Plus all through this rally it has been called “anemic” so why should it travel higher or last longer than average? We can also note that there is a big clump of points much worse than where we are now.

And, if we look at the median (rather than the average) even including the 1942 superstar, we find that according to “Chart of the Day”  although the current rally is “well below average in both duration and magnitude” it has now reached median status — “its magnitude and duration is greater than six and less than six Dow rallies since 1900.” So the current rally is not statistically required to go any higher, it could easily stop right here. And according to the ROC it certainly looks like it might be doing just that.

Note: The chart plots “major rallies” since 1900 i.e. an average of one every 8.8 years. A major rally is defined as an advance that follows a 30% decline i.e. a major bear market.  There have been 13 major rallies during this period.

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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