Friday, December 14, 2007

Daytraders' Challenge: Stock Market Performance by Time of Day

Many times short-term traders struggle because they don't realize how their market is trading at the times of day in which they are active.

Here we see the Dow Jones Industrial Average for 2007 broken down by time of day performance. The blue line represents the cumulative performance of the first hour of trading; the pink line is the performance for the middle hours (end of first hour to beginning of the last hour); and the yellow line is the performance for the final hour of trading.

What we can see is that these seem to be different markets. Indeed, the daily correlations among the three range from .12 to .18, suggesting that what the market does during one time period is only very weakly related to what it will do in the next one.

Moreover, we can see that essentially all of the market's upward trend has taken place during the first hour of trading. The first hour has accounted for about 1116 points of gain during 2007; the middle hours have lost about 780 points; and the last hour has gained about 719 points. What that means is that daytraders who sit out the first hour of trading have not, as a whole, benefited from the upward market trend. Indeed, there has been something of a downward trend to the market's middle hours.

We can see that, during the market's recent weakness, there has been relatively little selling in the last hour. Much of the market's bounce from November lows has occurred during the first hour--and most likely during overnight action in response to strength in Asia and Europe. Too often, short-term traders look at a daily chart and try to go with a trend, not realizing that the trend may not pertain to the hours of day in which they're trading.


Stock Market Performance by Hour of Day