Tuesday, December 20, 2005

QQQQ: What Happens After the Open

Psychologists tell us that we tend to place undue emphasis upon the most recent events when anticipating the future. When we see a market open the day strong, it is only natural to think, "This is a strong market," and anticipate future gains. But do strong openings predict strong day sessions?

I looked at the QQQQ (NASDAQ 100 ETF) from January, 2003 to the present (N = 749). The average price change from yesterday's close to today's open was .07%. The average price change from today's open to today's close was only .01%. Interestingly, this suggests that the majority of the bull market in the NASDAQ has occurred during the overnight hours, and that the day sessions have had little directional bias. The correlation between price change from close to open and open to close was -.10, suggesting that there is no tendency for strength or weakness at the open to persist during the day.

Indeed, when I conducted a median split, it was clear that market moves at the open--if anything--tend to be reversed. When the market opens strong (N = 375), the day session in QQQQ averages -.11% (180 up, 195 down). When the market opens weak (N = 374), the day session in QQQQ averages .13% (203 up, 171 down).

Moreover, when QQQQ opens strong, the day session in SPY averages -.07% (181 up, 194 down), but when QQQQ opens weak, the day session in SPY averages .11% (214 up, 160 down).

These are modest tendencies, but they highlight the danger in assuming momentum: that recent moves will necessarily persist.