During this recent consolidation stock markets around the world are down anywhere from 5-25% off of their 3-month high (table 1), but there has been a surprising calm in the markets thus far, at least according to some measures. Usually as a decline intensifies and temperature picks up, so to speak, there emerges some visible signs of emotional behavior on the part of investors. One of those signs of emotion is a rising number of stocks that gap down at the open of trading each day, signaling that some investors just want out regardless of the price.
In attempt to measure this emotional selling behavior we've built some charts that show the cumulative number of stocks that have gaped down at the open of trading over the previous 65 days (blue line, left axis, inverted). We point out that just several weeks ago this indicator made an all-time low going as far back as we have data. Sine then the number of gaping stocks has risen, but just barely, and the level is no where near the number of gaping stocks usually seen at the nadir of even modest declines. In fact, the small increase in the number of gaping stocks in solely a function of stocks in Asia, since the the number of gaps in both Europe and North America have fallen even as prices have declined.
Good lows are made when investors exhibit all sorts of risk averse emotional behavior, including selling stocks at the open of trading whatever the prevailing market price. From this perspective the recent decline in stocks has been accompanied by a lack of emotional selling pressure, which is one indication that we have further to go on the downside before we reach a good, emotional, low (a.k.a. buying opportunity).