Tuesday, January 01, 2008

2007 Stock Market Returns as a Function of Time of Day

It's been my observation that many traders--including some very accomplished ones at hedge funds--began experiencing performance problems around July/August of this past year. Among these challenged traders have been some that rely upon historical, quantitative patterns in making trading decisions.

Above we see returns for the S&P 500 Index (SPY) as a function of time of day. We can see that, beginning in July, returns from the overnight session (close to open) greatly exceeded those from the day session (open to close). Indeed, it was as if the market split into two different markets: one trading overnight and one trading during regular hours.

This made it difficult to hold positions over time, as overnight moves and moves during the day tended to reverse one another. Holding short positions in stocks for more than a day trade was particularly difficult.

It is unclear whether this bifurcation of returns might be part of what tripped up many traders. The fact that the split occurred just at the time many traders reported having problems with returns, however, makes me think that those holding positions overnight and those counting on daytrades to follow short-term trends were adversely impacted.


2007 Returns by Day of Week