Market Rate of Change (no bottom yet)
June, 6, 2008
 

Back in June, I looked at the rate of change on an S&P500 two-week chart.  The increasing volatility got me thinking that maybe there was a kind of ebb and flow to the markets, on a long-term scale.  It turns out, there kind of is.  Of course, it's not at all 100% predictable, but the subtle pattern is evident all the way back to the early 1960's.
 
Rate of Change (ROC)
This simple indicator is calculated as follows, for 2 weeks:
[(Current Price / (Price 10 days ago))-1 ] * 100
 
Just take the current price divided by the price 2 market weeks ago.  Subtract 1 and multiply by 100.  Easy.
 
The Pattern
The market seems to go through phases when the ROC bounces in a tight range, then alternatively begins to bounce wildly above and below that range.  The latter condition occurs when we hit very high volatility periods.  An extreme to the downside has shown excellent results to step in and buy the market.
 
Chart 1 1960-1986
To find out where the historical extreme lows might be, I looked at history.  The first chart I've attached shows the market from 1960 to 1986.  There are at least 5 clear times when the 2-week rate of change in the market made an extreme low, ususally around -10.  From the chart, you can see that it doesn't happen very often.  In this period, the bottoms were indicated approximately 4 years apart.  Each was an excellent buying opportunity, as long as you remembered to take some profits after a respectable gain.
 

Market Rate Of Change, 1960-1986

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Chart 2 1990-2008
The second chart shows the market since 1990, and up to June of this year when I first noticed this phenomenon.  When pundits on CNBC were calling every dip in the market THE bottom, I didn't go for it.  Through June, we had only gotten down to around -6 or so.  Major bottoms over the past have required at least an ROC fall to the -10 neighborhood.  I wrote in my comments a month or so ago that I felt like we were going to see at least a big swoosh down before the market bottomed.  This chart was part of my research that told me that.

Market Rate Of Change, 1990-2008 June
 
 
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