The Myth Of 'Amateur Hour'

by: Chris Kacher and Gil Morales
Summary

The first hour often provides choice entries into stocks.

Institutions use the first hour strategically in terms of buying and selling stock.

I was the manager of the Institutional Services Group at William O'Neil + Co., Inc. where we advised over 700 of the world's top institutional investors.

Many investors have been misled into believing that they should refrain buying stocks at or near the open. Instead, they are advised to wait 45 minutes to an hour after the opening bell before entering long positions. This phony "rule" is based on the myth that the first hour of trading is "amateur hour," where only alleged amateur, know-nothing investors are foolishly buying stock.

Apparently, this rule was discussed in a recent book by another former O'Neil Portfolio Manager, but it is not clear to me how such a rule can be substantiated based on the empirical evidence. At best it comes off as a lazily-derived axiom based on mostly cherry-picked or anecdotally-based analysis. In fact, it is so easy to find real-time, real-world examples that entirely contradict this rule that I have to question the intellectual honesty of those selling investors on this type of claptrap.

To do this I can simply refer to recent experiences in my own trading and market-watching over the past couple of weeks, using five-minute intraday charts. I'll start with an example from this past Friday, June 2nd. Applied Optoelectronics (NASDAQ:AAOI) has been a mainstay of the VoSI Focus List over the the past several weeks.

On that Friday AAOI pushed to a new all-time high on a strong one-day move. This move began with the stock opening at 72.05, then trading down to 71.76 fifteen minutes later. From there it turned higher. If one had used the "Amateur Hour" rule, one could have bought closer to the 74 price level 45 minutes later and one hour later. Obviously, the rule would have kept one from buying the stock at the lowest prices of the day.

Arista Networks (NYSE:ANET) is another mainstay of the current VoSI Focus List that had a strong move on Friday, June 2nd, as well. It opened at 148.63, hit a low of 148.13 within the first five minutes of trading, and then shot back to the upside. Had you waited 45 minutes before buying the stock you would have paid somewhere between 150 and 151. Had you waited an hour you might have done a little better, perhaps buying a little closer to the 150 price level. In either case, however, waiting 45 minutes to an hour was clearly inferior to simply buying right near the open.

First Solar (NASDAQ:FSLR) is one I remember well from May 24th, about a two weeks ago. The stock had a strong upside move that day, and it started with a $37 even print at the opening bell. Within the first five minutes it pitched down to a low of 36.73, turned back to the upside, and never looked back. If you were foolish enough to wait 45 minutes after the open before buying, you would have bought the stock closer to the 37.80 price level. Wait an hour and you would have paid closer to 38 for the stock. Another fail for the Amateur Hour rule.

Finally, we can look at the recent hot IPO Snap (NYSE:SNAP) that has had its moments of going both hot and cold at different times since coming public. One of its hotter moments occurred about two weeks ago on May 25th. The stock had already posted an undercut & rally buy signal after it rallied back above the prior 18.90 low in the pattern on May 12th. This U&R set-up came on the day following a big gap-down move the company reported earnings on May 11th. The daily chart below gives the macro-picture of the stock's action since it came public back in early March.

On May 25th, SNAP finally regained its 50-day moving average, defying those who had written the stock off for good after the May 11th earnings report. We can see that on May 25th the stock opened up at 20.16, traded down to 20.11 within the first five minutes of the trading day, and then launched higher. Had one waited 45 minutes later to enter a buy order, one could have had the "advantage" of paying up for the stock somewhere between 21 and 21.20. Waiting a full hour after the opening bell before buying shares of SNAP would have resulted in the same "advantage." Consider this a major fail for the "Amateur Hour" rule.

So the hard evidence entirely refutes the need to rely on such a poorly-considered, ill-advised rule of waiting 45 minutes to an hour before buying a stock you are interested in. I would also say that intuitively, based on my own personal experience, any idea that only amateur, know-nothing investors are buying within the first 45 to 60 minutes of the trading is false on its face.

Back in the days when I was the manager of the Institutional Services Group at William O'Neil + Co., Inc. where we advised over 700 of the world's top institutional investors, I spent a lot of time visiting our floor brokers down on the floor of the New York Stock Exchange. Back then O'Neil owned one seat on the NYSE and leased another, and I would travel to New York once or twice a year to hang out with our floor brokers, Louie, Eddie, and Steve (Steve replaced Eddie after he retired).

They appreciated the human contact with someone from the "home office" and I appreciated the amazing experience of running around on the floor with these guys executing big orders during the trading day. Usually the day began with a five-star breakfast (anything you wanted was there, including a chef cooking custom omelettes to order) upstairs in the NYSE Luncheon Club at around 8:00 a.m. Once we were finished having breakfast, we headed down the elevator to the trading floor in preparation for the opening bell at 9:30 a.m. New York Time.

I remember that on June 2, 2000 we never got to finish our breakfast. The monthly Bureau of Labor Statistics jobs number had come out at 8:30 a.m. right in the middle of our festive breakfast. It was a strong one and sent the futures rocketing higher. Louie and Steve had to leave us to finish off our omelettes on our own (Dr. K was with me on that particular visit) as they headed down to the floor to deal with the flood of institutional buy orders coming into the O'Neil Trading Desk back in Los Angeles. Back then clients would call in orders to our trading desk which would in turn call the O'Neil booth on the NYSE floor so that the staff in the O'Neil floor booth could execute the orders.

Notice that this wasn't a flood of retail investor "amateur" orders that were to be executed at the open, they were institutional orders. In fact there was never a single time that I was on the floor of the NYSE with our floor brokers where I didn't see massive six-figure or even seven-figure share institutional buy and sell orders getting executed right at or near the opening bell, and certainly well within the first 45 to 60 minutes of trading.

So where these rules about "Amateur Hour" come from is beyond me, defying both my intuitive and empirical senses. It just doesn't add up. And as we've seen from these examples (I'm sure you can find many, many more if you just expend the minimal effort to look for them), it is essentially another one of these phony bromides being passed of as hard investment rules and techniques. Don't fall for it.

Stocks should be purchased based on where they are in their chart patterns, not what time of the day it is. If a stock is sitting at a lower-risk buy point on its daily chart, then that is when and where it should be bought. Whether that is at the opening bell, an hour later, or an hour before the closing bell, is utterly irrelevant.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.