Friday, December 14, 2007

More on the Stock Market's Multiple Personality

In my last post, we saw how much of the stock market's strength was attributable to the first hour of trading. The first hour data, however, really includes two components: overnight action and trading during the first 60 minutes of a session.

In the chart above, we look at the S&P 500 Index (SPY; yellow line) and the changes during 2007 that are attributable to the overnight session (blue line) and the day session (pink line).

What we find is that the S&P 500 Index has been broadly range bound through most the year. This overall performance masks quite a difference, however, between the day and night sessions. The overnight action has had a distinctly bullish leaning; the day session has lost money over time. Indeed, we've gained the equivalent of about 158 S&P 500 Index points during the overnight hours and lost the equivalent of 102 points during day hours!

The correlation between price changes during the overnight and day hours has been about .17 during 2007, suggesting that less than 3% of the variance in price change is shared between the two. In essence, these behave as separate markets. Indeed, all of the gains in the S&P 500 Index since the start of 2006 are attributable to overnight action. Daytraders may limit their risk with intraday trading, but they have also missed out on much of the bull market's reward.


The Multiple Personality of the Market


Zach said...

Nice analysis. I've noticed many similar trends on declining stocks revently. The stocks usually open higher, but as the day goes on, they slowly trend into the red.

Looking at the chart, the first half of the year, the overnite and day returns were similar. Then during the summer, they completely diverged.

It would be interesting to see if similar relationships occur during bear and bull markets of the past.

Brett Steenbarger, Ph.D. said...

Hi Zach,

Great question. My sense is that the relationship between performance during market hours and during overnight hours varies in part as a function of the relative strength/weakness of Europe or Asia.