Gavekal Capital: Stock Gaps at Market Open Signal Lack of Emotion/All Information Priced In

Monday, January 13, 2014

Stock Gaps at Market Open Signal Lack of Emotion/All Information Priced In

We measure stock gaps by counting each day the number of stocks in the MSCI World Index that open at least 2% higher (top chart) or lower (bottom chart) than the previous day's closing price and then take a running sum of those gaps over a 65-day period. The object of the exercise is to measure market volatility and investor sentiment and also to measure how much information is "priced in" at any given time. Presumably stocks in aggregate would exhibit more gaps (both higher and lower) when volatility is high or a high degree of information asymmetry prevails and fewer gaps when volatility is low or investors have discounted all available information (when information about stocks' worth becomes "common knowledge").  Perhaps not coincidentally then, highs and lows in the number of gaps occur with inflection points in the direction of the stock market.

So what are we seeing today? Since the middle of 2013 we have observed a sharply declining number of gaps on the market open to a level not seen since 2007. With VIX trading at about 13.5, we already know that implied volatility is low. But given the lack of stock gaping behavior could it also be that investors have priced in most of the favorable information about stocks in general? Time will tell, but the high correlations we observe in the below charts have our attention piqued.

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