The SPY (tracks the S&P 500) opened down 2.345% today. Counting today, since 1994, the SPY has gapped down more than 2.25% 17 times. It has closed higher than it opened 16 times with an average gain of 2.89%. Today SPY continued the trend closing 1.37% higher.
I discussed this trend in this earlier post. Here is the updated spreadsheet.
Here is a look back at the days with largest gap downs with intraday charts going back to 1998.
9/17/1998: The stock market was affected by the Russian/Emerging Market Crisis. Russia defaulted on their government bonds in August and September. Long Term Capital Management (LTCM) was unraveling due to related highly leveraged trades. LTCM was bailed out by the Fed on 9/24/1998.
9/21/1998: Russian/Ererging Market/LTCM Crisis.
10/8/1998: LTCM used up $1.9 billion of $3.6 billion injected into the fund the prior week with the Fed bailout. Another hedge fund, Tiger Management, lost $2 billion on October 7 because of the Yen Currency bets.
1/13/1999: Brazil scraps their currency support and lets their currency float resulting in currency devaluation.
03/13/2000: The Nikkei closed down 560 points (2.8%) as Japanese Q4 GDP was down 1.4 from the previous quarter. S&P Futures were down 27 points before open and Nasdaq futures were at a lock-limit down of 82.
04/27/2000: Nikkei closed down 115 points (0.6%); Korean Kospi fell 21 points (3%). U.S. Q1 Employment Cost Index rose 1.4% leading to fears that the Fed would get more aggressive in trying to cool down the economy. S&P futures were 34 points lower and the Nasdaq futures were at a lock limit down of 110 points before open.
03/14/2001: DAX was down 2.5%, FTSE was down 1.65% over concerns about a slowdown spreading due to hawkish ECB. Fitch downgraded 19 Japanese Banks. S&P and Nasdq futures were both trading lock-limit down before open.
09/17/2001: U.S. stock markets reopen after being closed since the 9/11 attack. The Nikkei closed down 5%. U.S. Equity futures were not trading prior to open.
9/21/2001: Nikkei closed down 2.35%; Hang Seng down 4.1%; Dax was down 6.38%, FTSE down 5.46%. S&P Futures were down 38 points and Nasdaq futures were down 48 points before open.
6/26/2002: Nikkei closed down 4.0%; Hang Seng down 2.4%; Dax was down 4.7%, FTSE down 3.1%. S&P futures were down 27 points and Nasdaq futures were down 44 points over WCOM accounting fraud concerns.
07/24/2002: Nikkei closed down 2.6%; Hang Seng down 3.3%; Dax was down 4.2%, FTSE down 3.0%. S&P futures were down 19.2 points and Nasdaq futures were down 18.5 points on weakness overseas and a follow-through of the previous day’s declines of 4.5% for the Nasdaq and 2.7% for the S&P.
1/22/2008: Nikkei closed down 5.7%; Hang Seng down 8.7%; Dax was down 0.9%, FTSE was up 0.2%. S&P futures were down 60.8 points and Nasdaq futures were down 83.8 points. There was a global equity selloff while the U.S. market was closed for MLK day. Fed cuts rates by .75% ahead of its scheduled meeting on 1/30/08.
1/23/2008: Nikkei closed up 2.0%; Hang Seng was up 10.7%; Dax was down 2.0%, FTSE was down 1.0%. S&P futures were down 39.6 points and Nasdaq futures were down 69.4 as ECB says that keeping inflation in check is top priority. Apple issues a disappointing outlook.
3/17/2008: Nikkei closed down 3.7%; Hang Seng down 5.2%; Dax was down3.5%, FTSE was down 2.3%. S&P futures were down 28.4 points and Nasdaq futures were down 46.2 points on news that Bear Stearns was being acquired for $2 a share by JP Morgan Chase. The Fed cuts the discount rate by .25% over the weekend.
Tuesday, March 18, 2008
Stock Market rebounds again after large Gap Down
Thursday, January 24, 2008
Bouncebacks after Gap Downs
The Big Picture took a look at Paul Kedrosky’s post on yesterday’s whiplash action. Paul looked at the number of times that the Dow opened the day down at least 1% and rallied to close positive from 1928 to now. He found that yesterday’s swing of 625 points from the low to the close was the second highest rally for the Dow ever (after opening down more than 1%).
I took a look at the S&P 500 from 1950 to yesterday. Yesterday was the biggest point swing in that period. It was 7th largest in percentage swings. For the Nasdaq Composite going back to 1971, it was the 27th largest in point swings and 19th largest in percentage swings.
You can use the scroll buttons on the spreadsheet to move down the spreadsheet.
Even though we have had 3 bouncebacks already this year, it is a relatively rare occurrence. From October 1938 to September 1958 it happened 22 times (about 1 time a year). From 2004 through 2006 it happened 17 times (about 6 times a year). Here is a chart showing how many times it has happened. You can click on the chart for a larger view. Notice the frequency during the Great Depression, the internet bubble, and now.
Wednesday, January 23, 2008
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.