Here we're looking at the Dow Jones Industrial Average on a daily basis (light blue line) from 2004 to the present. I've broken the Dow down into three components and set these to equivalent prices as of 2004 to highlight differences in performance (click chart for greater detail).
The first component is the Dow's performance during its first hour of trading (dark blue line). Note the steady ascent, as we've seen solid performance during the Dow's first hour. Indeed, nearly three-quarters of the entire bull market since 2004 has occurred during the Dow's first hour of trading. Had you done nothing more than buy at the previous day's close and sell at the end of the first hour of trading the following day, you would have picked up almost 3800 Dow points.
The second component is the Dow's performance during its middle hours (pink line): the hours between the end of the first hour and the start of the last hour. Observe that this time period has not participated in the bull market whatsoever. In fact, from 2004 to the present, the middle hours have *lost* a total of about 42 Dow points. What that tells us is that a good part of the daytrading market has not seen a directional bias, despite the significant ascent of the Dow over that period.
The final component is the Dow's performance during the last hour of trading. Rennie Yang of Market Tells notes that this has been weak of late, which he interprets as caution on the part of the smart money. We can see that the last hour has underperformed over the last two years. About a quarter of the Dow's overall gain since 2004 is attributable to the last hour of trading; since 2005, however, the Dow's last hour has actually lost money.
My interpretation of these findings is that the U.S. market has been a follower, not a leader, of other world markets. When overseas bourses rise in value--and we've seen stronger gains in EAFE than in the States--that strength is reflected in the next day's open in the U.S. and thus the first hour of trading in the Dow cash index. If that is the case, then an important implication is that participation in the bull market has hinged upon the trader's ability to hold U.S. positions overnight and capture that overseas strength. My breakdown of S&P 500 returns by overnight vs. day session supports this conclusion.
The takeaway? Just because a market is trending overall doesn't mean it's trending at the time frame you happen to be trading. Extrapolating from the day to day market to shorter time frames can be hazardous to your wealth.
The Last Hour of Trading as a Sentiment Measure
Who Controls the Markets?