Updated 12/18/2008

The NYSE Rate of Change (ROC) chart is very helpful in getting the "big picture" view 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.

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.

Current Analysis:

The NYSE  rebounded nicely last month. It was up  3.28% on a monthly basis but still down -43.31% on an annual basis!

It has the makings of a bottom (or at least a major bear market rally) if there are no major mishaps in the financial arena. 

According to SeekingAlpha.com the average bear market lasts 393 days from the top to the bottom.  If the top was October 9,  2007 that would put the bottom at November 7, 2008 very close to the bottom we registered on November 21, 2008.

And what about average decline?  Well the average bear only takes the market down 30.57% so we are well below that.  So we have met the time and distance criteria so it is possible we have seen the bottom.

At the moment the market is trying to sort out its true valuation.  For more information on how to decide what a stock's true value should be see How Much is a Stock Really Worth? What to Do Now?  and What is the Real Price Earnings Ratio and How do I use it?

Also see the  NASDAQ ROC Chart for more information.

Tim McMahon, Editor
Financial Trend Forecaster

Disclaimer:

At Financial Trend Forecaster we are not registered investment advisors and do not provide any individualized advice. Past performance is not necessarily indicative of future performance and future accuracy and profitable results cannot be guaranteed.

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