Another Morning, Another Gap

Another morning, another large gap open.

For 8 out of the past 10 days, investors have started the session with prices far removed from the prior day's close. All but two sessions began with the S&P 500 futures showing a pre-market gain or loss of more than 0.5%.

When this occurs with an open that's at the lowest point of the past three months, it has signaled either the middle of a waterfall decline (2008) or the end of an exhaustive move (every other date).

It's also extremely rare. Since the futures began trading in 1982, it hadn't happened until 2001. All occurrences were clustered between 2001 and 2011 (Figure 1).

Figure 2 provides the dates along with the S&P's returns going forward. The returns are from the open of the 8th gap out of 10 days, when that open was at a three-month low in the futures.

This is nothing different from other studies in prior days. The kind of oversold reading and price jumpiness we're seeing has led to binary outcomes - either we're in the midst of a crash, or this is the end-game volatility as stocks are putting in a multi-week to multi-month low.

Given the recession probability noted in yesterday's Daily Report, and the fact that (so far) the S&P is holding above its  August lows, we're still giving more weight to the latter scenario.