Thanks to volatility in the markets, not only the VIX?a popular yardstick of market volatility?has been higher for the year 2011, but also the numbers of days the stock market traded with a ?gap?.
According to FE analysis, in 2011, there has been a big jump in the number of days when the markets closed with a ?gap? as compared to the previous day?s range. In 2011, the number of such gap days jumped to 21, three times that in 2010 and highest in more than a decade.
Market participants cite this phenomenon as a sign of indecisiveness among traders as domestic and global headwinds continue to affect the market activity.
According to Savio Shetty of Prabhudas Lilladher, the rise in number of gap days is another indication of uncertainty among traders. ?The rise in number of gaps during 2011, especially in the last three months, indicates a rise in market volatility even as the Nifty has hovered in a tight range of 500 points between 5200 and 4700.?
A gap day is a trading day when the market trades with a gap to its previous day?s range (its high and low). Hence, the market is said to have had ?gap up? when its open as well as low for a particular trading day is higher than its previous day?s high. Similarly, on a ?gap down? day the open and high of a trading day are lower than the previous day?s low. For example, the market had a gap down on Tuesday last week and a gap up on Wednesday.
Generally, such market movement with gaps are attributed to traders? reaction to overnight developments. These developments could be any domestic or international development which are announced after market hours and can affect the market. Even an excessive move in the US equity markets for instance can have a huge impact on local markets resulting in market gaps.
During 2010, six out of the total seven gap days were gap up days as the market for the most part of the year was in a bullish trend. There have been almost equal number of gap up and gap down days till July this year. However, since August the gap down days (7) are almost double than gap up days.
?The market movement since August with respect to the gap occurrences highlight the tight coupling between the global markets. As the number of risk factors continues to rise, increasing gap days portray volatile market in general,? added Shetty.
In the last three months there has been an heightened uncertainty on the policy-makers? efforts to tackle the sovereign debt problems in Europe. Even speculations regarding the RBI?s policy actions to balance higher inflation and slowing economic growth have added to increased market volatility.
