Recently, it seems that the stock market has had trouble holding onto gains throughout the day. Over the last several weeks, there have been numerous instances where the market opened higher only to see the gains fizzle out by the time the trading day ended. With that in mind we analyzed two trading strategies to see where the bulk of the S&P 500's gains have been coming from.
In the first scenario, we calculated the cumulative performance if one had bought SPY at the close and sold at the open the following day ('market closed'). In the second scenario, we calculated the performance of buying at the open and selling at the close each day ('market open'). In the chart below, we show the results where the green line indicates returns of the 'market open' strategy, and the blue line highlights the performance of the 'market closed' strategy.
During the first half of this bull market, the 'market open' strategy outperformed the 'market closed' strategy by a wide margin. This indicates that most of the gains were being made during regular trading hours as investors would buy into weakness. Since late 2004/early 2005 however, the 'market closed' strategy has outperformed the 'market open' strategy, indicating that the S&P 500 often closes lower than it opens i.e., investors are selling into strength.
Coincidentally, in January 2005, just when the 'market open' strategy was hitting its peak performance, NYSE CEO John Thain made headlines when he suggested that the NYSE would extend its trading hours by opening one to two hours earlier. With the recent lackluster performance of stocks during the regular session, maybe we would be better served by doing the opposite and shortening the trading day.
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