One of many market internal indicators that we use– the number of stocks that are gapping lower at the open of trading– is signalling an increase in emotional selling behavior over the last month or so, quickly jumping from 1,000 to 2,000 (blue line, axis inverted) for the MSCI World Index. While this move is not without precedent, the historic correlation between an increase in down gaps and a decline in the market warrants attention– especially in light of how quickly the number of down gaps can accelerate as market prices decline.
In this instance, we define a gap as a stock opening at least 2% below the previous day’s closing prices. The combination of 1. no buy orders at the last closing price and 2. orders to sell at the market price at the opening of trading, produces a gap lower and suggests increased investor willingness to exit positions with little regard for the cost of doing so.
A look at the gaps in each region comprising the MSCI World Index reveals sharp jumps in the number of down gaps, more than doubling in both MSCI Europe and MSCI Pacific. Meanwhile, gaps in MSCI North America continue to remain at very low levels relative to history.
In emerging markets, gaps down have generally trended higher since late 2012/ early 2013– with the notable exception of MSCI Latin America, where gaps have deviated significantly from price trends in the region.
