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-ROC Analysis:
Unless you’ve been living under a rock you know that most markets including the NYSE took a major tumble earlier this month. On August 17th the NYSE closed at 10,818 and by August 25th it had fallen to 9,692 for a loss of 10.4% in just over a week. Fortunately, it has rebounded a bit since then and as of this writing stands at 10,105. This is still down 6.36% since last month and 7.96% since a year ago. If you had exited the market on February 2014 when the ROC generated its sell signal you would have been out at around 10,254 and could have been safely invested in some sort of fixed income investments.
If you had earned 2% per year over the last 18 months your investments would currently be the equivalent of NYSE 10,561. Interestingly, the peak way back in 2007 was at 10,311. So we are just back to where the market was eight years ago. Looked at that way this hasn’t been that great of a bull market. And if we adjust for inflation… the market is still underwater.
With Summer over and the NYSE ROC below zero, hopefully the market will begin to pick up. A lot depends on the FED actions and how “accommodating” their policy is from here on out. Last month we said, if the NYSE breaks through its support line we could see a major free-fall. And that is exactly what happened.
The Current NYSE Chart
Charts Courtesy of Yahoo Finance
Looking at the 1 year chart we can see a steady decline (lower peaks) since May 21st so this is the current resistance line. Theoretically the market could rise to this line from current levels and still not be out of the woods. This could still be a set-up for a downward break through the rising support line and a move to lower levels.
But if it breaks decisively up through the resistance (possibly on news from the FED) we might see some further gains. But as I’ve been saying for quite some time, this market is getting “long of tooth” and a mere 10% correction will not eliminate the excesses that are currently in the system. So it is quite possible to see another bigger move down before this is all over. A likely scenario would be a regain of 2/3rds of the loss which would take it to 10,442 and then it would begin another 1,000+ point drop. Based on Elliott wave analysis it might look something like this:
Probably it won’t be so direct… more likely it would remain bounded by both lines and make its way nearer and nearer to the point until it has nowhere to go and then break down. So we could see a move above 10,442 as long as it doesn’t break above the resistance line and still see another leg down.
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.
The following chart of the S&P 500 was published on September 3, 2014 so the rally has now lasted several months longer although as we said the market really hasn’t gone up significantly during that period.
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 February 2015 the market has increased about 64% up very slightly from the 62% it registered in this chart so the only difference is a slight sliding toward the 1000 trading days mark and closing in on the 1962 rally. By looking at the chart we can see that the current rally is still a bit anemic in that it is below the linear regression average line but has already lasted a bit longer than average so a major correction can happen anytime. As a matter of fact, only 5 out of the 23 rallies have lasted longer than the current rally and 1984 lasted virtually the same length but produced much better returns. So we have 5 lasting longer without a correction and 17 lasting shorter. One factor that might influence our perception is that two of the longest 1990 and 2002 are more recent. Also a major factor is the FED’s unprecedented quantitative easing still only resulted in less that average performance. Plus, it is possible that the FED’s actions are extending the duration of the rallies but they could also be making the crashes worse as well.
Note: The S&P 500 was not adjusted for inflation or dividends. Selected rallies were labeled with the year in which they began. There are 252 trading days in a year (100 trading days equal about 4.8 calendar months).
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 S&P 500 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.
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 had 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%. By January 2015 the annual rate of return neared zero (1.25%) but by February 2015 the market had picked up again and annual returns had rebounded to 7.8% by May gains were 5.48% annually but the majority of that occurred in June of 2014.
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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