Lately the stock market is doing less napping and more gapping.

This chart shows the number of trading gaps the S&P 500 has incurred by calendar year. It defines a gap as any time the S&P 500 opens 0.5% higher or lower than its closing level from the previous day.

In 2018, the S&P 500 experienced 42 gaps (23 up and 19 down), more than double the 20 seen in 2008.

This year, through May 24, having already endured 22 gaps, the index is on pace to surpass last year’s number.

While it may be of some interest to calculate, quantify, and analyze the gaps themselves, it’s arguably more valuable to use their occurrence as a measure or indicator of what is happening on a broader scale.

What does it say about the world we live in, that gaps are now happening at twice the rate they did during the great financial crisis?

From 2012 to 2015, when the financial crisis had subsided and rates were still low, the market experienced no gaps. In 2016, when the Fed began to raise rates on the heels of the Brexit vote and the presidential election, the number of gaps began increasing.

Perhaps the more frequent gapping is the equity market’s way of saying the Fed has tightened too much too quickly, analogous to the bond market’s inversion of the yield curve.

Or maybe the gaps are a response to growing uncertainty surrounding the US-China relationship and the broader geopolitical landscape.

Whether stemming from these reasons or others, investors will do well to mind the gaps and to seek to understand the implications of their more frequent occurrence.

Unless otherwise noted, data is sourced from Bloomberg.
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