Study: the stock market is gapping up


The S&P 500 is constantly gapping up (i.e. today’s OPEN is higher than yesterday’s CLOSE). The S&P gapped up 33 out of the past 42 trading days (2 months).
Some investors and traders see this as bearish sign. They see this as “market manipulation” in which central banks and institutional investors use the overnight low-volume to artificially propel stocks higher.
Let’s put aside these conspiracy theories. What does history say? Here are the historical cases in which the S&P gapped up at least 33 of the past 42 trading days.

  1. January 11, 2018 (current case)
  2. September 5, 2014
  3. April 10, 2014
  4. October 29, 2013

This is a very limited sample of 3.

September 5, 2014

The S&P 500 began a 9.8% “small correction” 2 weeks later.

April 10, 2014

The S&P began a 9.8% “small correction” 5 months later.

October 29, 2013

The S&P began a 6.1% “small correction” 2.5 months later.

Conclusion

You can see that gap ups are becoming more and more common. They weren’t common during previous bull markets. There’s a simple explanation for this.
With increasing globalization, European and Asian investors are becoming larger and larger forces in the U.S. stock market. Their buying U.S. stock market futures on the overnight (their daytime) causes the U.S. stock market to gap up. There’s nothing sinister about gap ups.
More importantly, you can see that a lot of gap ups isn’t a bearish sign for the stock market in the medium-short term. This is a useless indicator. Investors and traders should ignore gap ups.

5 comments add yours

  1. Thank you Troy for your inspiring posts.
    I’ve been reading trading comments from many people, but most of them are something like
    “If market goes up, then it could possible go higher. If it goes down, then it might crash. Or not.”
    They are always right. And useless!
    Your comments are clear, easy to understand and verify. This means being professional.
    Thumbs up!

  2. Troy, can you please do a historical backtesting blog post on how the market reacts to the incoming of a new fed chairman? I heard somewhere, maybe on Bloomberg that the market experiences a small correction on the incoming of a new fed chairman. Would like to know if this is true. Thank you for your time and hard work.

  3. Troy, upro came out in 2009. What vehicle were u using prior, spy? Also if upro is 3x levered and the s&p was trading at an estimate of 700 when upro came out and s&p is at 2800, that would give the s&p at its current price a 400% return, with 3x leveraged upro that would make it a 1200% return. $10 x 1200% = $120 but the current price of upro is $172? Can u help me out with the math on this one? On a side note, this guy I caddie his golf bag for, he was loaded up on faz 3x leveraged financial bear etf in 2009 after the bottom of the correction. He initiated a massive class action lawsuit into the mathematical algorithmic inner workings of the computational 3x leverage formula, because he found out it was deteriorating in price at a much faster pace than the 3x leverage. I think he proved his case and won millions as the lead class action Investigater into the pricing.

    • I wasn’t trading UPRO before 2009. But you can easily create a replica of UPRO by using es futures to match 3x the S&P
      UPRO matches the day to day changes of SPX by 3x. So overtime, UPRO compounds on itself.

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