Market Analysis

Minds the Gaps

As our see no risks market continues chugging along near all time highs again you may have noticed that many of the gains since the September lows are again coming via magic overnight gaps.

So what you say? If the market doesn’t mind it doesn’t matter. And it’s true as Art Cashin once said: “All gaps fill, if ever”. A cheeky hint that gaps can remain unfilled for a long time or never fill.

But if the entire rally construct is dependent on open overnight gaps one has to wonder.

To make my point here’s a chart of the $SOXX since the September lows:

Gap after gap after gap. All unfilled making a mockery of the concept of intra-day price discovery. Gap, ramp & camp.

If this all looks somewhat familiar, it is. After all we saw the same nonsense during the August squeeze to new highs:

What happened to all these gaps?

They all got filled in September, every single one of them.

Yes, gaps matter. Individual gaps may not matter, but consecutive clusters of them increase reversion risk to backfill the gaps.

And note this rally here is no different other than it being even more steep:

There is of course still the matter of the September down gap that is still open an it may well fill, but as you can see this market has some backing and filling work to do.

But for added twist and giggles these are just the gaps in the last 14 trading days.

What about the gaps since the March low? For a reference check $DIA, the ETF that tracks the $DJIA:

That’s a lot of open gaps. A lot.

This market is working really hard to convince everybody that nothing matters and that things are different this time. Well, they have to be, because there is no technical history that suggests that this many open gaps are sustainable without some backing and filling. None.

And because of this history the message is clear: Mind the gaps.

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Categories: Market Analysis

13 replies »

  1. You’ve hit on one of the things that has bothered me about this current market. This year, it is the futures market that drives the cash SPX. I trade daily and usually close out the bulk of my trades before the end of the day. I’ve been frustrated to see that often 80% of the next day’s move is captured in the overnight market. Do you have any insights into who is moving the market overnight? Is it foreign buyers? I assume that the overnight volume traded is much lower than the SPX cash, is this true? If so, then how does lower volume off-hours trading continue to drive the market higher?

    • Hey Anton, that overnight gap-up process that you mention started (and has since continued) during the GFC. It is either large institutional money (think Blackrock) or “The Plunge Protection Team” or both . . . driving the market. As there is little to no liquidity during the night large contract purchases can move the market either way. And as a “retail” trader you don’t want to be on the wrong side of those moves. For added prospective you might want to read Michael Lewis’ book “Flash Boys” which is one of the earliest works on high-frequency automated trading.

      Woodland (Sacramento) CA

    • recent stories of the SoftBank option buying could be a possible cause…they are based in Asian timezones although certainly could be trading it from any timezone given their worldly presence

  2. The market is easier to move on low volume. The PPT (plunge protection team) starts their algorithm in the early overnight. Everyone is sleeping. They ramp the markets on low volume. The liquidity providers come in and start making markets and new levels. Rinse repeat. This is complete market manipulation by the government. It is not a market. The stock market is a farce.

  3. Sven and others are more expert on the tech analysis side than I am, but if we do spike up to new highs it would almost be perfectly bearish divergence on the RSI and MACD daily and probably weekly SPY graphs, with what I see as a possible 5th wave up into that divergence. toss in the potential that if we make new highs into the election at the onset of whatever the winter pandemic effects are, and there could be plenty of ammo for a sizeable move down to fill all those gaps even back to March as Sven notes exist. Dems might spend a ton but they’ll be raising taxes as well

  4. Between the PPP and the Dark Pool money the mini futures move the most during the overnight session…hence we are all playing against The House…in this case Black Rock, who has a direct line to Powell and Mnuchin (also providing direct line to GS-see their “trading profits for the quarter yesterday)…anyone who stays in over night for short term trading is foolish.
    If you want to talk about gaps that never fill you can go all the way back to July 14 on the Nasdaq in 2009 and then see the numerous gaps through 2012…all which have never closed. So in this instance Art Cashin is the savant…when you have this much Central Bank intervention you can not expect Price Discovery and old time market technicals to behave the way they “should”…

  5. SOXX is know for GAPs like these…NVDA weight in SOXX (and its volatility as a semiconductor company trading at 40x sales) I think has a bit to do with it

  6. Sven – With so many Repub senate members “trash talking” the Pres, who really thinks they will go along with a $1.8 to $2.2 TRILLION dollar stimulus package right before the Pres most likely loses the election (74% chance of loss via latest betting odds). There is little chance the Repub senate will “Go BiG”, as they know the Pres is “Going Home”. At some point the smart money is going to figure this out, and my guess soon…

    Per CNN:

    Complaining about Trump’s “stupid political obsessions,” (Repub Sen Ben) Sasse stressed during the call the possibility that the President’s political brand could alienate women and young voters in the future.
    “If young people become permanent Democrats because they’ve just been repulsed by the obsessive nature of our politics, or if women who were willing to still vote with the Republican Party in 2016 decide that they need to turn away from this party permanently in the future, the debate is not going to be, you know, ‘Ben Sasse, why were you so mean to Donald Trump?’ ” he said. “It’s going to be ‘What the heck were any of us thinking that selling a TV-obsessed narcissistic individual to the American people was a good idea?’ It is not a good idea.”

  7. Stimulus seems like a low probability event before January 2021, yet markets will get pumped regardless. Pelosi in no way is going to give the Pres a win before elections. McConnell in no way is going to be able to get his Senate to vote anything above $1 Trillion. Mnuchin in no way is going to be able to negotiate stimulus while located in the Middle East. Kudlow in no way is positive about stimulus when he said it is “almost impossible” today. The stock markets in no way are tied to reality, at least for those in the bottom 99%. Yet expect more “Trade Deal Progress” pump-n-dumps over the next few weeks and months.

    Per Bloomberg:

    Pelosi also cited multiple so-called poison pills, “including their radical Liability Provision which forces workers to risk their lives in unsafe workplaces with no legal recourse.” Senate Majority Leader Mitch McConnell has been a strong advocate for liability protections for businesses to shield them from coronavirus-related lawsuits as they reopen.

    McConnell has raised his own major roadblock to any deal: the size. President Donald Trump said Thursday he was prepared to go beyond the $1.8 trillion his team had been trying to offer to Pelosi, who favors a $2.2 trillion plan.

    “He’s talking about a much larger amount than I can sell to my members,” McConnell said Thursday of Trump’s latest position.

    Mnuchin is expected to head to the Middle East in the coming days, adding to signs that a pre-election agreement on stimulus won’t be forthcoming — though both sides have pledged to keep working on it.

    “The important point here is you only got” 18 days until the election, Kudlow said. “Even if you made a deal it would be almost impossible to execute. Maybe some of it can be executed. But you certainly couldn’t get a grand large deal” through by Election Day, he said.

  8. Agreed. Perhaps the only route to a pre-election stimulus is for Trump to cave to most of Pelosi’s requirements to get it through senate on Dem support, he may be desperate enough to do that but I doubt there’s sufficient trust between them to make it possible. However, if that does look possible McConnell (who is no cert for re-election) might get on board. Devious, I know, but stranger things have happened.

  9. Friday’s close was fugly. (Refer to my market comments on “See No Risk” a couple back for context). A mostly constructive day based on tepidly positive econonews soured badly in the last hour of RTH for no obvious external reason and closed below the optimistic day’s open. Overall 1% was lost from indexes in the last hour plus 15 minutes after hours.

    Pressure is distinctly down. Maybe starting to take COVID seriously? Whatever, the crowds are clustering round the exit and it’s now probably a will they – won’t they game. If they do there’s a lot of potential downside in the next month, if they don’t there’s not much upside. Bet accordingly.

  10. It’s now down to the wire on stimulus. Unless something is agreed in next 72 hours at most then nowt can happen before the election. The end of stimulus optimism means that some other optimism must replace it else there is no optimism left to buoy stocks. Earnings and vaccine hype are unlikely to cut it. Crowds danced yet closer to the door today, sudden and significant moves expected this week.

  11. Senate Republicans, will not be voting yes for a “big, beautiful stimulus” anytime soon. At some point, Wall Street will pull the rug out before elections, then during election and a few hours after elections via futures, that is when the smart money places their bets and everyone else will be swept away by the big money players. If it feels like gambling at the high roller table with a small stack of $5 chips, thank J-Pow and twitter in chief. Roll the dice gamblers…as this ain’t investing no-moooor!

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