Based on data going back 90 years, whenever the 12-month rate of change (ROC) in the Dow Jones Industrials Average has exceeded 40 percent, it has generally signaled trouble ahead.

In three cases, a 12-month ROC above that level has only marked a short-term pause, after which the market traded higher.

But on 11 other occasions, similarly rapid advances have been followed by notable corrections, including the collapses that followed the 1929 and dot-com era peaks, as well as the 1987 crash.

Given those odds, increasingly exuberant bulls might want to have a rethink.

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Category: Technical Analysis, Think Tank

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2 Responses to “Dow 12 Month Rate-of-Change Sends Warning Signal”

  1. ashpelham2 says:

    Michael, it’s a little hard to tell from the chart, but what is the average of those corrections in terms of percentage-from-peak. That information might have a significant importance to investors who maybe could live with, say, and average of 9% correction down. But if that correction is more like 18-20%, then, that’s a different thing altogether.

  2. It stands to reason too. The market can only get ahead of the economy for so long before the metrics begin to skew. This normally leads to classic mean reversion.