Warning: “Cliches May Be Boring,” But Nature Does “Abhor A Vacuum”

For all the celebratory market moves on Monday morning, there’s been no shortage of commentary from folks who seem hell-bent on ruining the fun.

Which is just fine with us, because we’ve got a kind of morbid fascination with watching people get frustrated when they’re not allowed to celebrate in peace.

But really it’s not just the punditry fading the rosy French election narrative. Treasurys are fading it too. Have a look:

yield

That’s probably as good a setup as any for some interesting color out about an hour ago from Bloomberg contributor Cameron Crise who warns that although “mind the gap” may be a tired-ass cliche, it’s got some merit – historically speaking that is.

Via Bloomberg

“Mind the gap” has become something of a cliched warning to traders whenever prices open a substantial distance away from the previous trading day’s range. Nature abhors a vacuum, the thinking goes, and prices generally move to close the gaps with alacrity.

  • Given the large number of gaps that have developed over the weekend because of the French election, traders will no doubt wonder how seriously to take the traditional warning. I decided to take a look.
  • I looked at six different asset prices relevant to the current environment: EUR/USD, EUR/JPY, the S&P 500, the Euro Stoxx 50, and U.S. and German 10-year yields. I identified two different types of gaps: those where the opening price was outside the previous day’s trading range, and those where the entire day’s trading takes place outside of the previous day’s range.
  • The frequency of gaps naturally depends on the nature of the market. Those markets with round-the-clock trading, such as FX and Treasuries, have fewer gaps than markets with limited trading hours, such as equities.
  • For every market, however, the majority of opening price gaps close sometime during the day. That ranges from 60% for the two equity indices to nearly 90% for the foreign exchange rates.
  • Even those gaps that are sustained for the duration of the trading day tend to close relatively quickly. The median lifespan for a sustained gap in each market is somewhere between two and four days.
  • The average gap length is higher, however, because sometimes a gap is sustained — for years, on occasion. A gap higher in EUR/USD after Easter 2006 was not closed until May 2010, for example.
  • Still, the preponderance of evidence suggests that the gaps observed since the French first round will close sooner rather than later.
  • Cliches may be boring, but sometimes there’s a kernel of truth to them. Traders will ignore this one at their peril.

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