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Thursday, February 9, 2023
Today’s newsletter is from jared blikre, a market-focused reporter at Yahoo Finance. Follow him on Twitter @SPYJared. Read this and more market news on the go with the Yahoo Finance App.
Technology is off to its best start to the year since 2019, with the Nasdaq Composite gaining just under 14% in 26 sessions this year, even with Wednesday’s red close on major US indices.
However, for those investors waiting for all to be clear before going all-in, there remains at least one critical hurdle for bulls to prove they have successfully taken the reins from the bears: overnight.
Specifically, the bulls need to assert their dominance not only during the normal trading day (open to close bells), but also afterwards, over the much longer period of time from close to open.
The US stock market is open 6.5 hours every day, from 9:30 a.m. to 4:00 p.m. By contrast, this means it is closed 17.5 hours a day, or 73% of the day. time on any day of the week. Throw in two full days of downtime over the weekend, and in any given week, the market is closed more than 80% of the time. (Yes, after-hours sessions extend this considerably, but this is not an option for large investors who need liquidity to absorb large orders.)
It is not surprising to find that overnight and weekend returns generally lead the overall market. That is, the net returns over time from each night’s close to each morning’s open tend to directionally confirm whether the stock is going net up (a bull market) or down (a bear market).
To study this, we use SPDR S&P 500 Trust (SPY) as a general market indicator, going back to mid-1998 (when our intraday data begins). During that time, SPY was up 301 points, with 92% of those gains (277 points) occurring outside of regular business hours. This means that if you had stayed outside of the market each trading day (buying at the close and selling at the open) still they have 92% of the total profits of the market.
We can find even more useful information by subdividing the day’s session between the bells into three smaller parts: the two opening hours, the two closing hours, and the time in between (colloquially called “lunch” or “daily calm”).
Not surprisingly, what happens during the middle of the day does not predict or reflect the general direction of the market. But the closure is quite useful. (Conventional market wisdom posits that investors who buy towards the close are better informed than those who trade towards the open, and there are several technical indicators that try to capture what the “smart money” is doing.)
Also called a sell-off, the close is the most important reference price of the day. It is what is used to calculate market returns presented to investors and regulators. Therefore, it is not surprising to find more buying than selling activity in the last two hours of the day in a bull market, and more selling than buying in a bear market.
Looking at the chart above, we can see that right now this year’s gains have been made throughout the entire trading day, including the last two hours. But more importantly, investors have been taking losses outside of normal liquid trading hours since November.
If investors are hurt in overnight trading due to market conditions, then we would expect them to be even more risk averse from shocks over the weekend. In fact, breaking down SPY returns by day of the week reveals that since the October lows, Mondays have been producing negative returns. Even if we exclude the day session on Monday and add performance from the Friday close to the Monday open (not shown), the results are substantially similar.
Wednesdays have also been negative from the October lows due, in part, to some steep losses following the Federal Reserve’s decisions. Wednesday’s 1.1% loss this week didn’t help, but overall, hump day yields have traded sideways into 2023.
Meanwhile, all net gains have been made on Tuesday, Thursday and Friday.
Bottom line: Looking under the hood at the market, it has improved considerably since October, but there is still a bit to go before the transformation from bearish to bullish is complete. Investors are being punished by holding during those long periods outside of market hours when liquidity is thin or non-existent.
Until that changes, the bearishness of the market should persist.
what to see today
Economy
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8:30 a.m. Eastern Time: unemployment claimsweek ending February 4 (expected 190,000, 183,000 during the previous week)
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8:30 a.m. Eastern Time: ongoing claimsweek ending January 28 (1.660 million expected, 1.655 million during the previous week)
Profits
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AbbVie (ABBBV), Apollo Global Management (APO), AstraZeneca (AZNL), Brookfield Asset Management (BAM), canopy growth (CGC), duke power (DUK), Expedia Group (EXP), hilton (HLT), kelloggs (K) Lyft (LYFT), news corporation (N.W.S.A.), PayPal (PYPL), PepsiCo (ENERGY), philip morris international (P.M), ralph lauren (RL), global S&P (SPGI), Thomson Reuters (TRI), under armor (AUA), VeriSign (VRSN), willis torres watson (W.T.), Yelp (YELP)
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