The Markets Are Nocturnal: Daytime vs Overnight Performance

Includes: DIA, QQQ, SPY
by: Michael Stokes

In this report I’ll show that the stock market is nocturnal – it moves overnight.

Below I’ve divided the S&P 500’s performance (using SPY as a proxy) into changes that occurred from the close to the open (overnight) and those that occurred from the open to the close (daytime) from 1993 to 06/2008, assuming an arbitrary starting value of $1,000.

The three lines above represent the SPY (blue), daytime changes (green), and overnight changes (red). The chart has been logarithmically scaled.

As the chart makes clear, the bullish trend over the last 15 years has been the result of what happens overnight, not during the day as stock market pundits and cable news channels would have us believe. Even during the irrational exuberance of the late 90’s, the daytime market was timidly flat. Additionally, the overnight market has been the more bear-resistant of the two and exhibited only about half of the volatility. Some stats:

The overnight and daytime markets have been almost completely unrelated. The correlation between overnight and subsequent daytime changes was -7.2%. Between daytime and subsequent overnight changes it was -7.7%. These are very disparate markets.

What’s the point? The point is NOT that we should only be trading the overnight market; there are a number of factors (ex. liquidity and transaction costs) that would need to be considered. The point is that each market presents different opportunities to different types of traders: very active long/short traders might prefer the volatility of the daytime market, while long-only traders might be wary of exiting positions at the close in a bull market.

This idea has been stuck in my mind for some time because it’s such a simple yet powerful concept that up until a month ago had been flying completely under my radar. I’ll be keeping this topic on my cutting board and trying to build some sort of workable strategy out of it - more to follow.