Full Disclosure: I’ve never actually been a day trader. It might be the golden age of day trading for all I know, but I do know a major change has taken place since 2016. No, I’m not talking about a certain Twitter addict. I’m talking about futures markets.
The CME launched the E-mini S&P 500 futures contract in 1997, and they can be traded nearly around the clock. If Russia declared war on the United States at 2:30 tomorrow morning, you could instantly sell some futures contracts rather than waiting for the cash market open (that’s not a recommendation for what you should do if Russia declares war tonight. In fact, you should probably find shelter). Transactions in the overnight futures market have an impact on where stocks open for trading every morning, and gaps (differences between opening and closing prices) are accounting for more and more equity market gains.
To gauge the impact of after-hours trading on market returns, I created two performance indexes: Daylight and Overnight. The first ‘buys’ the S&P 500 cash open at 9:30 ET and ‘sells’ the closing print at 4:30 ET. The second ‘buys’ the S&P 500 cash close and ‘sells’ the open on the following morning.
There was a time when the overnight session barely mattered. (Click charts to view them full screen)
The Daylight index (Red), excluding its superior performance during the financial crisis, tracked the S&P 500 (Black) with near perfection from 1998 to 2013. Unsurprisingly, the two had a near perfect positive correlation. Even through the first half of 2016, 3 years after the Overnight index (Blue) began to show consistent signs of life, the correlation held steady.
But the winds changed in the middle of 2016.
The correlation between the Daylight index and the S&P 500, while still high, has notably deteriorated since then. More importantly, the Overnight index has outperformed the Daylight index from that point in August 2016 to now. In fact, it’s accounted for about 70% of the S&P 500 gains over that time. If you’ve been day trading, maybe it’s time you took up night trading instead.
Another perplexing trend is a divergence in performance over the past few weeks.
Since early May, the S&P 500 has fallen more than 4% in the overnight trading sessions but has been up over 2% between the opening and closing bells. I can’t find a comparable period of such sustained and conflicting movement in after-hours trading. Even if I could, with only 3 years of relevant data, I wouldn’t have much confidence in assessing what it’s meant in the past. I certainly don’t know what it means for the future.
What I do know is this:
Gone are the days when markets truly closed. More than ever, being a money manager is a 24-hour gig.
Questions or Comments? Let me know
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