What is the NYSE Rate of Change (ROC)®?
The NYSE Rate of Change (ROC) chart helps quickly get the “big picture” of the stock market. 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. This makes it easy for you to know whether you want to be invested in the market or not. (See Below for Current NYSE Analysis)
Recently, while creating a new Crypto ROC chart, we made some MAJOR changes to the look of that ROC chart. We decided to carry those changes over to our other ROC charts as well. We included the index above the ROC signal so you can easily see where it has generated past signals. Also, I believe that it looks cleaner. In addition, we’ve changed the way we calculate the index to provide a slightly better sense of the monthly average.
Since this chart shows the rate of return rather than the current price, it is much easier to see market performance. We don’t have to guess if we are up or down from last year. If the ROC is below the zero line… the market is down. If it is above the zero line… the market is up. The key is to exit positions while in positive territory (with a gain) to avoid the loss, and then reenter when we get a buy signal.
The orange 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. 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 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 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 orange moving average line was basically flat, with a bit of wiggle. However, it was still flat at around a 12% rate of return, so holding during that period would have produced steady returns well above the long-term average. So it would have been difficult to know that the August 07 Sell signal was the real deal. But when it crossed below the zero-line in January 2008, it was definitely time to be out of the market. Had you gotten out, then you could still avoid significant losses.
If you are a short-term trader or simply looking for significant gains, the best buy signals come due to 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.
Prior to the “lower inflation” inspired rally, on November 14th, the NYSE ROC was very near a sell signal. Then the FED gave hints it might be nearing the end of its tightening phase, which extended the rally. But the July index has moved closer to the moving average.
Current NYSE-ROC Analysis:
Hold Signal
Looking Back:
Back in October 2021, Our NYSE ROC called an official SELL Signal. Three months later, the market peaked at 17,442 on January 13th, 2022, and then over the next 12 months it lost roughly 4,000 points.
In February 2023, the NYSE- ROC crossed above its 12-month moving average, generating a BUY Signal.
Since February 2023, the NYSE is up 20.0%. And this month’s ROC’s annual gains were 16.99% up from 14.20% last month. Unlike the NASDAQ, the NYSE is still well above its moving average. Although it turned down towards it last month, the NYSE turned up again this month. So we don’t have a sell signal but we do have a hold signal.
NYSE Composite Chart
Looking at the NYSE Composite Weekly chart a few major points stand out. First of all, it made a new high twice earlier in 2024, almost testing the long-term resistance. And now it has actually crossed above the resistance line. The first peak at 18,312 occurred the week of March 24th, 2024 and then it peaked again the week of May 12th. Both of these peaks brought the index within striking range of the Long-Term Resistance line which did its job and repelled the index and it fell.
This cross above the long-term resistance line is significant. The market is definitely at a point of exuberance. We can expect it to correct back down to at least the yellow Mid-Term Support. If that holds, the NYSE could move back up to the Long-Term resistance line. Over the longer term, the index should stay in the established channel.
NYSE vs. NASDAQ
Typically, the NASDAQ falls first as investors limit risk by switching to “blue chips”, then both fall in tandem. Uncharacteristically, from 2022-23, the NASDAQ was rebounding while the NYSE was running into resistance. The basic support of the NASDAQ has been provided primarily by A.I. and Tech stocks in the NASDAQ which has allowed the NASDAQ to almost catch up with the NYSE. This month Nividia, continues to show weakness so the NASDAQ fell and the NYSE made new highs.
FED Actions
For two years, we were saying that QE5 would take FED assets to $9 Trillion… and they almost got there. Then finally, the FED got its act together and started tightening. This resulted in roughly a 2/3 Trillion decrease (QT2), bottoming at 8.339 Trillion. But then a banking crisis broke out in California, and the FED jumped it back up, wiping out roughly 38% of the gains they made. Since then, the FED has been decreasing assets again. In July 2023, it broke below the March low hitting 8.298 trillion. By September 6th it was 8.101 trillion and by July 3, 2024, it was down to 7.221 trillion. FED assets after QE4 peaked at 7.169 trillion so all the gains above that have almost been erased. But that still leaves all the excess liquidity of QE 1-4.
Usually, tightening of this sort will result in a major stock market selloff but this time Mr. Market preferred the asset cut to high inflation. However, the market has been expecting the FED to cut interest rates, but that hasn’t happened yet, but FED Chairman Powell has hinted that it should arrive in September.
Source: St. Louis FED
M2 Money Supply
Looking at the M2 money supply we get a slightly different picture.
Here we see a steady growth of the money supply from 2009 through 2020 then a sharp spike as we saw with FED assets and then a slightly less sharp incline (but longer duration) taking M2 to 22 Trillion dollars in 2022. From 2022 to 2023 we see the decline we would expect due to the reduction of FED assets… BUT rather than continuing to decline as FED assets do, M2 levels begin to rise in October 2023, despite FED assets declining. This could be the reason for the rebound in the stock market, beginning at about the same time as this uptick in M2. Not surprisingly, this is just in time to boost the market for the November election. See comments on NASDAQ ROC about election year stock market performance.
Source: St. Louis FED
FED Funds Rate
The chart below shows the rapid increase in interest rates. In February 2022, they were just 0.08%… a year later, they were at 4.57%. By the end of May 2023, they were at 5.06% with a FED target of 5% to 5.25%. From August 2022 to August 2023, the rate went from 2.33% to 5.33% with the FEDs most recent 1/4% increase in their target rate which has held steady at 5.33% since August. Market participants continue to hope for a rate cut but it has held steady at 5.33% from August 2023 through July 2024 and will probably remain there until at least September.
But in the grand scheme of things, rates are still relatively moderate. Looking at the chart since 1954, the FED Funds rate was over 5% as recently as 2008, almost 9% in 1988 and 19.1% in 1981. In this view, we can see that we are just slightly above the average rate since 1954, which is 4.6% and we have just exceeded the 2007 peak of 5.26%. The one warning is that the last two times rates were this high a recession followed before too long.
Data Source: https://fred.stlouisfed.org/series/FEDFUNDS#0
NYSE Rate of Change (ROC) History:
In August 2012, the NYSE ROC generated a definite buy signal, not quite as dramatic as in 2009, but a good buy signal nonetheless. 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. 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 continued on the easy money path. So, the market picked up again, moving the NYSE once again into buy territory. Then, the market went basically nowhere for the next month, 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 typically 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 as we saw above, the market lost 19% from May 2015 through February 2016. The ROC then gave another buy signal in July 2016. With the rally actually beginning in February 2016 and August 2017, the index is up 31%. So the ROC indicator follows the old adage of getting out early and getting in late for the safest returns. We don’t try to get the first 10% or the last 10%; we are happy to get the 80% in the middle.
Background:
Back in September 2017, with the NYSE at 12,080, the ROC issued what appears in hindsight to be a Sell signal, but at the time, we called it a Hold. Subsequently, the NYSE fell about 1,000 points but rapidly rebounded, so the “hold” call was correct. Then, not surprisingly, with all that has happened, 2020 was a giant rollercoaster ride (aka. whipsaw) for the NYSE.
After passing a milestone in February 2020 of doubling since the September 2011 low (up 108.8%), the market was panicked into a massive “correction” by a combination of the Corona Virus (COVID-19) and falling oil prices. This generated what looked like another sell signal. And once again, we chose to hold through it, predicting a rapid rebound, which is precisely what happened.
In March 2020, the NYSE lost over -20% of its value. Then in April, it lost another -1.4%. At that point, it was only down -13.6% from the previous year’s levels (due to increases prior to the crash).
Then more than a year after the COVID crash, it APPEARED that the NYSE ROC had skyrocketed to an impressive 45% above previous levels. But that is primarily because the crash and recovery were so “V” shaped. The ROC measures against year-ago levels, which means that had you bought in May 2020, you would be up about 45% a year later. But had you bought in February 2020, you would “only” be up 15.7% by May 2021. This is still a respectable return but a far cry from 45%.
In September 2021, the NYSE was up 30.92% above September 2020 levels. But that is primarily because we are comparing against recovering 2020 levels. Compared to February 2020, the market was up 17.67%.
In October, the index was down -1.16% on a monthly basis. Thus putting the NYSE ROC in Sell territory (i.e., barely crossing below the moving average). November erased those losses with a 5.14% gain on the month, but that was short-lived. December lost -2.93% giving us a clear sell signal.
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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 considered?
For more information, see: NASDAQ Rate of Change
Tim McMahon, Editor
Financial Trend Forecaster
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