Despite New Highs, More Stocks Are Gapping Down on the Open of Trading

While (some) equity markets have gone a long way to erase the October decline or even eclipse the old highs, the number of stocks that are gapping lower on the open of trading is increasing. Why is measuring the number of gapping stocks important? It is a simple way of gauging investor emotional selling behavior.

Gaps as we define them occur when a stock opens at least 2% below the previous day's closing price. They are generated when there are no buy orders at the last closing price, but there are orders to sell at the prevailing market price at the open of trading. As buy and sell orders are matched at the open of trading, the stock price gaps lower to the nearest buy orders.

An increasing number of stocks gapping lower at the open suggests investors are willing to exit positions regardless of the cost. As we can see below, the number of gapping stocks over the last 65 days (blue line, left axis, inverted) is inversely correlated to stock prices and is increasing at a rapid rate in every region of the world and in DM as well as EM.