Price/Volume Diffusion Index Flashes a Warning, However the Index Remains Above 50.

The Price/Volume Diffusion Index has appears to have topped out, at least in the short-term. The lack of upside volume and increasing volume moves on lower prices have pushed the diffusion index 55.4 presently. This is off more than 3 points from last week, and represents more than a 10 point decline over the last month. The following is the latest chart of the diffusion index as compared to the movement in the S&P 500 index.



I believe the diffusion index is reflecting two relevant points.  First, the diffusion index is reflecting the slowdown in the upside move in stock prices, as the S&P 500 has largely traded flat since mid-March. I believe it also reflects a pick up of downside volume trends. As selling volume has outpaced demand-driven volume over the last few weeks. This is clearly shown in volume aspects in the chart below and the more so in the accumulation/distribution line.

This decline, in at least my mind, does not suggest once goes and short the market here. Although I have seen a fair amount of cracks in the facade of this bull market run (including a breakdown in the small-caps and the relative outperformance of low-volatility stocks relative to high-beta names), the fall off in the diffusion index may just represent a pause more so than an outright sell signal. Historically, it has been better to sell or sell short the market when the diffusion index and its component pieces show more negative trends.