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What is a Diffusion Index?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 December 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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A diffusion index is a measurement involving stocks that have exhibited an increase in price within a specific time frame. This measurement is normally expressed as a percentage and is often considered useful when analyzing the current status of the stock market. Several different indicators are utilized to determine the inclusion of a given stock in this calculation, including an analysis of the degree of positive momentum exhibited by the stock option during the period under consideration.

The general idea behind the diffusion index is to get an idea of what has changed from previous periods, and that degree of change has actually occurred. At the same time, the impact of those changes as they are spread out among a targeted group is also important to the process. Comparing the data that is gathered from various sources can provide insight into whether the options under consideration have increased, decreased, or remained largely the same from one period to the next.

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Determining the percentage of change essentially requires analyzing stocks based and determining if there has been an increase, a decrease, or if the option has remained virtually the same. Using a percentage scale, a response of 50% would indicate that no change had occurred in comparison to a previous period. Should the index provide an answer of 35%, this would mean that a noticeable decrease had occurred and serves as what is known as lagging indicator. At the same time, a percentage of 60% would indicate that some forward movement has taken place and is considered a leading indicator.

The value of a diffusion index is that the process requires gathering data from a number of other indices used to analyze stock movements. These sources, sometimes known as business cycle indicators, can provide an investor with the ability to compare and contrast data from each of these sources, and develop understandings of market movements based on the cumulative results of those sources. In theory, this means that the investor is more informed and able to make wiser investment decisions as a result of utilizing this technical analysis.

The utilization of a diffusion index as a measurement of stock market activity is often used in conjunction with other strategies as a means of providing a more in-depth analysis of the movement of the market in general, and of certain stock options in particular. Assuming the data is evaluated correctly, the result is a tool that can often yield valuable information that could have otherwise been overlooked. For this reason, brokers and investors alike often pay close attention to the diffusion index as it relates to a specific time period.

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