Tech has had its greatest start to the year since 2019, with the Nasdaq Composite gaining just under 14% in the 26 sessions this year — even with Wednesday's red close across the major U.S. indices.
Yet for those investors waiting for the all-clear before jumping all-in long, at least one critical hurdle remains for bulls to demonstrate they've successfully taken the reins from the bears: the night.
Specifically, bulls need to assert dominance not only during the normal trading day (from the opening to closing bells) — but also after, during the much longer time period from the close to the open.
The U.S. stock market is open 6.5 hours each day — from 9:30 a.m. to 4:00 p.m. Conversely, this means it's closed 17.5 hours of the day — or 73% of the time on any given week day. Throw in two full days of inactivity over the weekend, and in any given week, the market is closed over 80% of the time. (Yes, after-hours sessions extend this considerably, but this is not an option for large investors in need of liquidity to absorb big orders.)
It's not surprising to find that the overnight and weekend returns generally lead the overall market. That is, the net returns over time from the close each night to the open each morning tend to directionally confirm whether stocks are going net up (a bull market), or down (a bear market).
To study this, we use the SPDR S&P 500 Trust (SPY) as a proxy for the overall market, beginning in mid-1998 (when our intraday data begins). Over that time, SPY is up 301 points, with 92% of those gains (277 points) coming outside of regular trading hours. This means, had you stayed out of the market each trading day — buying on the close and selling on the open — you'd still have 92% of the market's overall gains.
We can find even more useful information by subdividing the day session between the bells into three smaller parts — the opening two hours, the closing two hours, and the time in between (colloquially called "lunch" or the "daily doldrums").
Not surprisingly, what happens during the middle of the day isn't that predictive or reflective of the market's overall direction. But the close is quite useful. (Conventional market wisdom posits that investors buying toward the close are better-informed than those trading toward the open, and there are several technical indicators that attempt to capture what the "smart money" is doing.)
Also called the settlement, the close is the day's most important reference price. It's what is used to calculate mark-to-market returns presented to investors and regulators. Therefore, it's not surprising to find more buying than selling activity in the final two hours of the day in a bull market — and more selling than buying in a bear market.
Looking at the above chart, we can see that right now the gains this year have been made throughout the trading day, including the final two hours. But critically, investors have been taking losses outside of regular, liquid trading hours since November.
If investors are getting hurt on overnight trades because of market conditions, then we would expect them to be even more risk-averse from pummelings over the weekend. Indeed, breaking down SPY returns by the day of the week reveals that since the October lows, Mondays have been producing negative returns. Even if we exclude Monday's day session and add up the return from Friday's close to Monday's open (not shown), the results are substantially similar.
Wednesdays have also been negative since the October lows due, in part, to some steep losses following Federal Reserve decisions. Wednesday's 1.1% loss this week didn't help, but overall, hump-day returns have traded sideways in 2023.
Meanwhile, all the net gains have been made on Tuesdays, Thursdays and Fridays.
Bottom line — looking at the market under-the-hood, it has improved considerably since October, but still has a bit to go before the transformation from bear to bull is complete. Investors are being punished by holding during those long stretches outside market hours when liquidity is scarce or nonexistent.
Until that changes, the bearish character of the market ought to persist.
What to Watch Today
Economy
- 8:30 a.m. ET: Initial Jobless Claims, week ended Feb. 4 (190,000 expected, 183,000 during prior week)
- 8:30 a.m. ET: Continuing Claims, week ended Jan. 28 (1.660 million expected, 1.655 million during prior week)
Earnings
- AbbVie (ABBV), Apollo Global Management (APO), AstraZeneca (AZNL), Brookfield Asset Management (BAM), Canopy Growth (CGC), Duke Energy (DUK), Expedia Group (EXPE), Hilton (HLT), Kellogg (K) Lyft (LYFT), News Corp. (NWSA), PayPal (PYPL), PepsiCo (PEP), Philip Morris International (PM), Ralph Lauren (RL), S&P Global (SPGI), Thomson Reuters (TRI), Under Armour (UAA), VeriSign (VRSN), Willis Towers Watson (WTW), Yelp (YELP)
