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)
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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) 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 daytrader 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. And in the last couple of months the rate of return has shot up considerably. At this point the red moving average line remains above the zero line and the index remains above the moving average. In addition, we still have a healthy gap between the moving average and the black line. So there is little chance of it crossing below for a while. Plus, with the FED Authorizing QE 3 and QE4 with no definite end (sometimes called QE infinity) the market is continuing on due to all the excess liquidity.
So until the NYSE ROC falls below its moving average we still have a buy signal. For more information see Quantitative Easing and Inflation
Also see the Inflation Adjusted NYSE Stock Index
Tim McMahon, Editor
Financial Trend Forecaster
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