Intraday Buying Opportunity when S&P Futures Gap Down 2% or More

Stock index futures are trading in an exceptionally volatile manner Sunday
evening, S&P futures ran up a quick 18 points in the first 90 minutes of
trading, and have since sold off a whopping 50 points. Lots of late-breaking
news contributing to the volatility, including a buyout of Bear Stears for
$2/share (!) and a Fed cut to the discount rate.

Assuming for the moment that futures open Monday's session around current
levels or lower, that would represent better than a 2% drop from Friday's
settlement. In the table below I've extracted every instance since the
inception of S&P futures in which the front-month contract opened down 2% or
more...

Front-month S&P Futures Contract Opens Down 2%+
01/23/08... S&Ps settle +5.4% from open, -0.2% intraday
01/22/08... S&Ps settle +3.3% from open, -0.4% intraday
07/24/02... S&Ps settle +8.5% from open, -0.6% intraday
06/26/02... S&Ps settle +2.4% from open, -0.2% intraday
09/21/01... S&Ps settle +3.5% from open, -0.1% intraday
09/17/01... S&Ps settle +0.2% from open, -2.1% intraday
03/14/01... S&Ps settle +0.3% from open, -1.0% intraday
02/16/01... S&Ps settle +0.2% from open, -0.5% intraday
09/22/00... S&Ps settle +2.1% from open, -0.0% intraday
04/27/00... S&Ps settle +1.9% from open, -0.0% intraday
03/13/00... S&Ps settle +1.4% from open, -0.0% intraday
01/13/99... S&Ps settle +1.2% from open, -1.2% intraday
10/08/98... S&Ps settle +1.6% from open, -2.6% intraday
09/21/98... S&Ps settle +2.6% from open, -0.5% intraday
09/17/98... S&Ps settle -0.2% from open, -0.6% intraday
08/23/90... S&Ps settle +0.3% from open, -0.0% intraday
08/06/90... S&Ps settle -0.1% from open, -0.3% intraday
11/03/87... S&Ps settle -0.7% from open, -4.4% intraday
10/28/87... S&Ps settle +5.1% from open, -0.9% intraday
10/26/87... S&Ps settle -3.4% from open, -4.4% intraday
10/22/87... S&Ps settle +21.0% from open, -3.5% intraday
10/19/87... S&Ps settle -23.7% from open, -25.0% intraday
06/17/82... S&Ps settle +0.0% from open, -0.3% intraday

Note the definitive tendency for the S&P to settle above the opening,
especially in recent years. Since 1990, the S&P has closed above the opening
print in virtually every case (15 out of 17 cases). That suggests big gap down
opens have increasingly meant that most of the market's downside risk has
already been priced in. While there certainly can be intraday fluctuations, as
you'd expect, two-thirds of the time the drawdown was limited to 1% or less.

Categories : Archived EOD Commentary, End-of-Day Commentary

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