Tuesday, January 22, 2013

Market's Price/Volume Diffusion Index Points to Higher Prices

Just a quick update on the most Price/Volume Diffusion Index model results that I discussed yesterday. Through Friday's close, the diffusion index suggests better-than-average demand for stocks with an index value of 61.2, as seen in the 2-year chart of the S&P 500 and the diffusion index below.


Additionally, the rolling summation of the raw indicator remains in an upward path.


Using historical results as a guide, the average 6-month performance of the market following this sort of setup has been a positive 4.9%, on average, versus a typical increase of 4%. This is while the batting average of this setup, again using history as a guide, indicates the market has increased in 74% of all instances following this scenario. This compares to a typical batting average of 67.5% for all time periods since the early 1950's.

This all said, I also think the rally may be getting somewhat long in the tooth. For one, the diffusion index, albeit still above 50, has rolled form the recent high of 66.5 late last year. This is while the slope of the summation indicator has turned over......



.... while long-term charts show this more clearly.

Long-term Diffusion Chart


Long-term Slope Chart


This leads to me think that we are in the later stages of this rally, albeit a rally that could run towards the highs given the still postive price/volume characteristics. 


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