Wednesday, August 19, 2009

Why Daytrading Stocks in the U.S. is an Increasingly Limited Proposition

With weakness in China spilling over to commodities and generating buying interest in 10-year Treasuries and the U.S. dollar, we're seeing meaningful weakness in the U.S. stock index futures in overnight trade. On one hand, this doesn't surprise me; in yesterday's tweets and in the evening briefing, I emphasized that U.S. stocks were acting toppy in the afternoon. What is notable is that today, like Monday, the anticipated weak move started in Asia.

Concretely that means that daytraders--those who are closing their positions out by the end of New York trading--have not participated in a fair degree of recent market movement. This is because market moves increasingly are not beginning in the U.S.; they are reflecting global themes of growth and weakness, with much attention paid to China and other emerging markets.

So, for instance, I see that, since June, the average movement during the overnight session in the S&P 500 Index (SPY) has been .56%; the average open to close movement has been only a little larger at .72%. For 25 of the 56 sessions since the start of June, we've seen more movement from yesterday's close to today's open than from today's open to today's close.

This is not a very recent phenomenon: it has been a feature of 2009 trading that was not present in 2008 or 2007. With decreasing volatility, we are seeing less overall market movement, but we've also seen a shift in the locus of that movement. This has made daytrading the U.S. equity markets an increasingly limited proposition. It has also wrongfooted many portfolio managers who are looking to execute their ideas during U.S. trading hours.

My best assessment is that this is not a temporary phenomenon. Globalization is here to stay and, if anything, we'll see more of it as the world diversifies its reserve currencies. If that is the case, look for some of the best trading opportunities to occur when U.S. traders are literally asleep at their wheels.


Markus said...

Yes, this time around it is a big advantage to trade equity and fixed income instruments in Europe.



im79 said...

Hi Dr.Brett,

in regards to your post on overnight moves and the link to the Emerging Asia/China setting the tone i have a question.
Why do you think that European hours then (cause thats where most of the volume and vertical movement has happened during Globex)have dominated vertical movement and not Asian hours ?


animal spirits said...

Good morning Dr. Brett,

Once again you have clarified WHY I either have made or should make changes to my trading approach. The summer market seems to chop daytraders up (assuming this has been the case for others besides myself) more often than providing a trend day. Many days start out looking like a possible trend, only to go into a rounded reversal or transition to a TIGHT range midday. This is why I have inquired recently regarding weekly pivot, R and S points. For a couple of weeks now I have had more success swing/position trading using the weekly numbers than I was having scalping. I use the formulas you posted some time ago to calculate P, R1, R2, S1 and S2. However, my numbers were different than those on your blog Monday. I assume the discrepency is because your numbers were daily while mine were calculated on the previous week's H,L and C. Any chance you will resume posting the weekly P,R and S numbers before the week starts?

Best Regards and thanks.

OKL said...

while this is true in 2009, the US cash market liquidity is still unrivaled.

ClearAir said...

As a trader based in the UK, Europe hours aren't great either. Today for instance all the movement was before London opened with the FTSE making a decent move 2 hours beforehand.

London seems to be all over by 9am GMT leaving a long wait until the US opens.

The US then either confirms or reverses these early moves with Europe following the US lead.

eric said...

How would a US Equity Prop Trader get into trading other markets?