Large Gap Down Days

On Tuesday, Bespoke Investment Group (B.I.G.), had a timely post on the largest down gaps in the S&P 500 tracking SPY ETF since 1994. They discovered that “when gapping down 2.5% or more, the ETF has traded higher 8 out of 9 times for an average gain of 2.69%.”

Since their post, the market has gapped down over 2.5% two days in a row and has closed over 3% higher than the open on both days.

I have updated a spreadsheet showing the gap downs going as far as -1.75%. When the market has opened up down 2.25% or more, SPY has closed higher 15 out of 16 times for an average gain of 2.99%.

The QQQQ ETF is much more volatile. When the market has opened up down 3.5% or more, QQQQ has closed higher 11 out of 13 times for an average gain of 2.48%.

When the market gaps up, there isn’t an apparent trend. Most of the gap ups were during the Internet Stock bubble.

You can use the scroll buttons on the spreadsheet to scroll down to the bottom of the spreadsheet.



I have also included the maximum loss the trade would have incurred (ETF open to low of the day). The stock market crash of 1987 illustrates the importance of stop losses. On October 19, 1987, the Dow Jones Industrial Average opened down 4.4% and finished the day down 22.6%. A lot of the NYSE stocks didn’t open as the sell orders swamped the buy orders.

I also included a study of the 30 current stocks that are in the Dow Industrial Average going back to 1980. Some of the 30 Stocks have been added since 1980. However, I used their stock data as if they were in the Dow the whole time. 8 stocks did not have data going back all the way to 1980 so I calculated an average with the remaining stocks (some of the companies that were in the Dow in 1980 have merged with other companies). Also I used a simple average giving each stock equal weight.

When looking at the Dow stocks, stocks that gapped down actually closed down from the open. The stock market crash in 1987 played a big part. But that was not the only reason. Prior to 1994, 12 out of 18 times stocks closed down from the open when they gapped down. However, even during 1994 - 2008, 7 out of 16 times stocks closed down from the open when they gapped down. The disparity between the SPY and the Dow components could be due to the fact that NYSE stocks don't always open promptly at 9:30am EST. Also the actual trading price of the SPY sometimes varies from the theoretical value of the index.

Here is a great interactive multimedia intraday chart of the 1987 stock market crash.

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