What is the NYSE ROC©?

Updated 2/17/2012

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.

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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) rather than waiting until we have a 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 if the slope is up the market is moving up. And obviously if the line is basically flat the market is not trending at all.

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 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 been holding 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 Analysis:

The NYSE ROC is up 5.50% for the month on top of  6.28% last month bringing us above the 8000 level which cuts the loss to -3.72% for the last 12 months. Thus if you had held the entire NYSE (or a fund that emulated the NYSE) for exactly one year you would have lost -3.72% . This is slightly above the level of January 2006, so you could have exited the market 6 years ago and invested in interest bearing investments and done better or you could use the ROC to avoid major downturns.

With the ROC dipping below the zero line it looks like we could be repeating the double dip beginning at the red arrow. The next buy signal won’t occur until the red moving average line gets closer to the black index line and the black line is able to cross back up through the average line. Although a move above the zero line could be considered a buy signal for more aggressive traders.

Robert Prechter has been predicting that the market will remain in the long term doldrums as the economy continues to deflate through 2016.

Tim McMahon, Editor
Financial Trend Forecaster

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