Time of Day Tendencies for the US Stock Market

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Now Is the Time to Find and Buy Your ‘Forever Stocks’

Use this stock market rout to buy best-in-breed stocks now for cheap

Last Tuesday seems like a lifetime ago. But that was the day I sent a Smart Money report that opened with these two sentences: “Stock market routs are miserable events. They sow widespread financial pain and suffering … along with a heaping dose of anxiety.”

Over the following days, we discovered just how miserable these events can be, as the Dow Jones Industrial Average plummeted about 5,000 points and all the major averages dropped into an official bear market.

Most likely, the major averages have not yet reached their bear market lows. Based on probabilities, the stock market averages will drift even lower than they are today and will reach their ultimate lows a few weeks or months from now.

That said, the stock market is not one big monolithic creature. It is a market of stocks. Even if the S&P 500 does not bottom out immediately, many individual stocks will.

“Best of breed” stocks, in particular, tend to bottom out first, and then move higher while the rest of the market is languishing. And because we investors rarely get the opportunity to buy best-of-breed stocks on the cheap, we should be looking for the opportunity to do that — starting right now.

“Stock market selloffs are the extreme events that create opportunity. They produce the panic selling and ‘washouts’ that usually offer great moments to make savvy long-term investments…

History tells us that moments like these are what buying opportunities are made of. So if you have the stomach for it, do a bit of buying over the next few weeks … while others are fearful.”

It’s now time to put this philosophy into practice.

Buying Forever Stocks in the Worst of Times

I don’t think it’s too early to begin moving into stocks that you hold through good times and bad. Think of these investments as your core holdings. Treat these Forever Stocks as your “Elite 8” or “Top 10” — or whatever number you decide on.

In total, these stocks should represent about 25% to 35% of your total portfolio.

These are the stocks you hold through thick and thin, unless the rationale for owning them changes significantly or you decide to replace one of them with a different stock.

Obviously, these Forever Stocks will suffer during the coronavirus from China-driven bear market we’ve just entered. But these losses are a small price to pay for big long-term gains.

Conventional wisdom says that market lows are the best time to buy stocks. Yet — thanks to our emotions — it’s also the hardest time.

As the late investing legend Sir John Templeton famously observed: “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude … and pays the greatest reward.”

So what type of security is a Forever Stock? What belongs in your Elite 8?

I’m talking about dominant, world-class businesses like Amazon (NASDAQ: AMZN ), Nike (NYSE: NKE ), Walmart (NYSE: WMT ) and Microsoft (NASDAQ: MSFT ).

While there’s no set definition of a world-class business, I believe they share at least four critical traits:

  • Forever Stocks possess an impregnable competitive advantage over their competitors — a “moat.”
  • Their competitive advantage shows itself through rising revenue and cash flow. (Earnings should be rising as well. But accounting gimmickry can easily manipulate profits, so I generally ignore reported earnings and focus mostly on revenue and cash flow).
  • They use cash flow to enrich shareholders, through rising dividend payouts, share buybacks, astute acquisitions … or a combination of all three.
  • They maintain a healthy balance sheet in order to preserve their financial flexibility and resilience.

In the rest of today’s report, we’ll talk about that competitive “moat” I highlight in No. 1. (We’ll discuss the other factors in future Smart Money articles).

That moat could be a superior distribution network, like some railroad companies possess. Or it could be superior content, quality or convenience — or some combination of these traits.

Factors like these create a moat around the corporate “castle”…

Protect the Castle

Amazon’s moat is its huge global distribution network, which allows it to sell goods at competitive prices and with superior convenience.

Most traditional retailers can’t compete against that. You all know Amazon stock’s success story.

Nike’s moat is its reputation for superior quality. During the last 20 years, Nike’s stock has delivered a whopping total return of 3,000% — more than 16 times the gains of the S&P 500 over the same stretch.

Like Amazon and Nike, most world-class businesses develop products or services that weave themselves into our daily lives.

When consumers develop loyalty to a brand, they resist switching and become less price-sensitive. Both of these tendencies help companies sustain long-term sales growth and healthy profit margins.

That’s good for shareholders.

In the early 1980s, I was a manager of the Hard Rock Cafe in West Hollywood. That place was hoppin’ all day, every day. From the moment we opened the doors for lunch until we shut down the bar after midnight, that restaurant was packed with customers.

On many days, that Hard Rock raked in more dollars from selling T-shirts, bomber jackets and other merchandise than it did from selling hamburgers and milkshakes.

That’s the power of a strong brand — and a strong moat.

And it’s why owning Forever Stocks is so important.

I’ll see you back here soon with more on why we pay more attention to revenue and cash flow than profits when it comes to identifying Forever Stocks.

P.S. To date, I’ve spotted more than 40 investment opportunities in which folks could have made 1,000% gains or more by following my recommendations — plus another 20 or so that made 500% gains or more. And now I’ve put together an analysis on what I believe could be my next 1,000% winner.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.

The Stock Market Works by Day, but It Loves the Night

The daytime is for losers. Overnight is when the big money is made in the stock market — not by trading but by getting a good night’s sleep.

That’s because of a gap between daytime and overnight returns in the American stock market. The real profits for investors have come when the market is closed for regular trading, according to a new stock market analysis by Bespoke Investment Group.

The Bespoke data builds on the findings of academic researchers, who have documented the existence of the gap, without being able to entirely explain its cause.

“We can show that the gap exists,” said Huseyin Gulen, a finance professor at Purdue University who has written about the issue. “But at this point we don’t know exactly why.”

Simply put, the gap may be defined as the difference between stock returns during the hours the market is open, and the returns after regular daytime trading ends. How the gap is calculated may not be intuitively obvious, though.

One set of returns is straightforward: It is based on prices at the start of trading in New York at 9:30 a.m. to the market close at 4 p.m. The second set is, essentially, the reverse: It is price returns from the 4 p.m. close to the market opening at 9:30 a.m. the following day.

Because stock prices at the market open tend to be higher than the price at the previous day’s close, you don’t actually have to stay up all night and trade on an electronic network to rack up overnight gains. Simply holding shares while you sleep will do it. So for buy-and-hold investors, these findings are particularly encouraging: Get your rest, ignore the temptation to trade and you can do just fine.

The new Bespoke analysis focuses on the returns of the first exchange-traded fund in the United States: the SPY or SPDR S&P 500 E.T.F., which started trading on Jan. 29, 1993. That E.T.F. mirrors the Standard & Poor’s 500-stock index, which often serves as a proxy for the entire stock market (though it actually represents only 500 of the biggest companies).

The SPY’s overall price gain from its inception through January has been stupendous: 541 percent cumulatively, not counting dividends, Bespoke says.

But look more closely, as Bespoke did, and a remarkable fact emerges.

Separate the daytime and the after-hour returns and calculate them cumulatively, as Bespoke has done, and it turns out that all of that price gain since 1993 has come outside regular trading hours.

If you had bought the SPY at the last second of trading on each business day since 1993 and sold at the market open the next day — capturing all of the net after-hour gains — your cumulative price gain would be 571 percent.

On the other hand, if you had done the reverse, buying the E.T.F. at the first second of regular trading every morning at 9:30 a.m. and selling at the 4 p.m. close, you would be down 4.4 percent since 1993.

For 25 years, in other words, the daytime has been a net loss. To paraphrase Ray Charles, the nighttime has been the right time to be invested in the stock market.

One implication is immediate. “Forget about the news and the market ups and downs during the day,” said Paul Hickey, co-founder of Bespoke. “They are nowhere close to what they are cracked up to be.” In fact, he said, most people are better off if they just sit tight.

Buying and holding the overall market — using an E.T.F. like the SPY, or a traditional index mutual fund, or a very diversified portfolio of stocks — has been an extremely profitable strategy if you stuck to it for the last 25 years. On the other hand, buying and selling during the day has generally been a money-losing strategy — one that would have been far more painful if you had traded frequently, incurring steep costs, which would have compounded your losses.

That said, there are plenty of exceptions to these general statements.

Many individuals and institutions have made tons of money through short-term trading during regular trading hours, even if investors over all have not. Furthermore, the steadily rising stock market in the 12 months through January has been better in the daytime than it has been historically — posting gains in the SPY during regular trading hours of 9.2 percent. Still, the overnight gains have been much better: 13.4 percent over the same period. The gap in returns has endured.

Why it has done so is the subject of speculation. “We’ve got hypotheses,” said Michael Kelly, a finance professor at Lafayette College, who has studied the issue. “But we don’t really know why it happens.”

One possibility, he said, is that frequent traders laboring under the “illusion of control” believe that they can respond easily to information and events during the day but can’t do so as easily after hours, when there are far fewer market participants and less money, or “liquidity,” involved in trading. “People may be inclined to sell at the market close so they can feel in control of their money overnight,” he said.

There is some evidence that smaller traders are prey to this tendency and tend to sell late in the day — and that some big institutional traders, who are well aware of the day-night gap, tend instead to buy at the close and sell at the open.

Because relatively few people actually trade after the market closes, orders tend to build up overnight, and in a rising market, that will produce an upward price surge when the market opens. But during extended declines, overnight sell orders may cause prices to plummet when the market opens.

If there were no trading costs — possible in a thought experiment but not in the real world — an excellent strategy over the last few decades would have been buying shares at the last possible moment during regular trading hours and selling them methodically at the opening bell every day, Professor Gulen of Purdue said.

While transaction costs make that strategy uneconomical, he said, the concept may still have a certain value. “If you do know that you are going to make a trade on a given day, and you have the ability to choose when you do it, you might be able to take advantage of this pattern — buying late in the day and selling early.” Of course, the pattern doesn’t hold every single day, and you could easily be disappointed.

Part of the gap in returns can probably be explained by the human tendency to panic at bad news, Professor Kelly said. “That panic seems to happen during the day,” he said. “One advantage of not trading during the day is that you aren’t as likely to participate in panicky selling.”

His data shows that during the bear market year of 2008, the overall market, as represented by the SPY E.T.F., declined 36.8 percent. But most of the damage occurred during the day, with losses of 26.7 percent, compared with only 13.8 percent overnight.

But further study needs to be done before the mystery of the day-night gap is unraveled, he said.

In the meantime, Mr. Hickey said, “If you are tempted to day trade, this is another argument for not doing it,” he said. “And trading after hours is in some ways, even riskier, because with fewer people in the market, prices can be erratic.”

Slow and steady investing generally avoids these problems. And over long periods, it has paid off. Frequent trading generally has not, either night or day.

Seasonal Tendencies You Can Trade with ETFs

An expanding number of ETFs, combined with the computational power to find seasonal tendencies in the stock market, means ETF traders can utilize these tendencies for trade selection and timing. Seasonal tendencies occur for varying reasons, such as an elevated mood heading into Christmas, seasonal changes, or short-term phenomenon such as one day of the week performing worse or better than others [see How To Swing Trade ETFs].

Below we take a closer look at three seasonal tendencies you can use to your advantage.

Six-Month Cycle

Ever heard “Sell in May and go away?” This trading phrase is derived from the Stock Trader’s Almanac disclosure that there is a tendency for the stock market to perform better during the six months of November to April than the six months between May and October. Between 1950 and 2020 the average percent change in the best six months was +7.5%, while the gain in the other six months (May 1 to October 31) was only +0.3% [Download 101 ETF Lessons Every Financial Advisor Should Learn].

Sy Harding introduced a way to trade this seasonal pattern in his book, “Riding the Bear.” The basic concept is to use a MACD to find entry and exit points that align the six-month seasonal tendency. A buy entry occurs when the MACD makes a move into positive territory (above zero line), or the MACD crosses above the signal line near the start of the bullish cycle. A sell occurs when the MACD moves into negative territory (below zero line), or the MACD crosses below the signal line near the start of the bearish cycle.

Figure 1 shows the strategy applied to the SPDR S&P 500 ETF (SPY, A).

Figure 1. MACD 6 Month Cycle Strategy – Weekly Chart. Click to enlarge. Created with FreeStockCharts

Signals may occur slightly before or after the “official” start and end dates of the six-month cycles. The cycle or signals are not infallible, though; sometimes the best six months will not produce a profit, and in other years the historically bearish six month period may outperform the historically bullish six month period [see 5 Most Important Chart Patterns For ETF Traders].

20 Year Seasonal Study of S&P 500

A seasonal study looks at how the market performs in given months over a long period of time. This highlights tendencies in certain months and also highlights different points of the year that are historically favorable for stock purchases or sales. For an in-depth visual analysis of the S&P 500′s performance, please refer to The Complete History Of The S&P 500 Index.

Figure 2 shows a 20-year seasonal chart of the S&P 500. Common high and low points for stocks are marked on the chart.

Figure 2. 20 Year S&P 500 Seasonal Study. Click to enlarge.

This seasonal study also confirms the six-month cycle from the previous section. November through the end of April usually sees more of a rise, while May until the end of October shows a tendency to stay flat over the last 20 years.

While 2020 was a bullish year for the S&P 500, and therefore most buy strategies would have worked, the major high and low points in Figure 2 could still be used to make trades in the Core S&P 500 ETF (IVV, A).

Figure 3. Buy and Sell Based on the Seasonal Tendencies. Click to enlarge.

While the high and low points of the year are approximations, they did a good job of capturing major price swings in the ETF through most of 2020 [see our Visual Guide To Major Index Returns by Year].

Monday Blues and Tuesday Turnaround

There is also a definite pattern to days of the week when tracking the broad market’s performance – some days far outperform others. According to the Stock Trader’s Almanac, since 1980, Monday has been the worst performing day, barely edging out a positive return over this period. Tuesday is the best performing day, followed by Wednesday, and Friday is the third best performer of the week, moving up 25% of the time.

Short-term traders can plan purchases and sales based on this phenomenon. During an uptrend, buying near the Monday close and holding until near the close on Wednesday takes advantage of the depressed prices on Monday, as well as the common jump that occurs on Tuesday and Wednesday. Ideally, long positions shouldn’t be held through the weekend, unless the trend is very strong, or you can hold through the likely sluggishness on Monday. Tuesday has a tendency to be especially strong if Monday was down more than 1% [see also 17 ETFs For Day Traders].

The same approach can be applied when stocks are broadly heading south; when the equity market is in a downtrend, taking short positions on Friday and holding until late in the session Monday takes advantage of Monday’s weakness.


These types of patterns have occurred historically, yet in any given year, week or day the tendency may not occur. All the tendencies are based on studies going back to 1950 (or earlier) to the current. Over this period there was an upward bias in the market, which is reflected in the results. Most of these tendencies indicate positive returns, yet that may not always be the case. For example, Tuesday may still perform better than Monday, but during a downtrend all the days of the week may see negative returns [see also A Brief History of ETF Bubbles].

Therefore, seasonal tendencies should never be relied on exclusively, but rather combined with other forms of analysis and risk management to find viable entry and exit points. Seasonal tendencies provide an approximate time window of where trades have a high probability of working out, but each trade still needs to be within risk tolerance levels and if the seasonal pattern doesn’t work out, you’ll need an exit plan.

The Bottom Line

Seasonal tendencies provide a unique view of the market, showing the historical probabilities of certain price occurrences or time. Combined with other technical analysis methods and risk management tactics, ETF traders and investors can use seasonal tendencies to aid in finding entries, exits and choosing the best times to trade.

[For more ETF analysis, make sure to sign up for our free ETF newsletter]

Disclosure: No positions at time of writing.

Outside the Box

Ing-Haw Cheng

Trading in the VIX futures market was a step behind in assessing how bad COVID-19 would get

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The speed of the fall in the stock market and increase in market volatility over the past month has been stunning.

From its mid-February highs, the S&P 500 SPX, -1.51% is currently down about 25%, while the CBOE Volatility Index VIX, -4.23% , a gauge of volatility in the stock market, spiked to reach an all-time high of 83. In trading on April 2 it finished at about 51.

Did the market underappreciate the risk of a full-blown coronavirus pandemic?

An important clue suggests that the market was indeed a step behind in appreciating the risks that a pandemic posed. The clue comes from the somewhat obscure, but highly traded, VIX futures contract market. The VIX is a widely followed gauge of market volatility, and the VIX futures market is akin to a prediction market for where the VIX will be in the future.

As a starting point, it seems reasonable to wonder whether markets were completely wise to the risks of the coming pandemic before this all started. On February 19, the S&P 500 closed at a record high just 14 points shy of 3400. The VIX closed around 14; a value which was, as with most days over the bull market of the preceding years, well below its historical average of 20.

These events occurred even though the first U.S. case of the COVID-19 coronavirus had been reported in the mainstream news and confirmed by the CDC on January 21. The news out of China had been dire; on February 12, the media reported 14,000 new cases in Hubei Province alone.

By March 2, coronavirus cases were spiking in Europe, and the U.S. had reported possible community spread as well as its first coronavirus-related death. The S&P 500 then had declined to just under 3100. The VIX meanwhile had risen to 33, certainly a large increase from 14. But did that reflect a full appreciation of the growing risks in the market?

On March 2, with the VIX at 33, the futures contract expiring March 18 settled at a futures price of 26, suggesting that markets expected the VIX to fall 7 points over 16 days. The VIX tends to move predictably towards its long-term average — let’s call that 20 — so even though things turned out worse later, the forecast of 26 at the time did not seem unreasonable.

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But because the VIX tends move toward its average, we should ask: On March 2, with the VIX at 33, where would a statistical model put the VIX as of March 18? Using well-known techniques I discussed in a 2020 article published in the Review of Financial Studies, a statistical model estimated using the history of the VIX would have produced a forecast just exceeding 30.

Both forecasts turned out to be far wide of the mark: things got worse fast. The VIX spiked to around 70 by March 18. Because the futures price was below the statistically fair forecast, investors had expected more volatility to subside than the fair forecast.

The key observation is that the futures price fell below the fair forecast. Usually it’s the other way around: the futures price typically exceeds the fair forecast of the VIX. The reason is that a trader who buys a VIX futures contract hedges higher uncertainty and thus pays a higher-than-fair price. Instead, with prices below the fair forecast, investors in the VIX futures market were a step behind the forecast in assessing how bad things would get.

Investors weren’t just lagging the fair forecast on March 2, either. As the graph below shows, starting on February 24, futures prices fell below contemporaneous statistical forecasts of the VIX for over two weeks. Crucially, there is a tendency for futures prices to shoot up following such days. This suggests that investors were over-optimistic about how much volatility would subside.

This type of pattern isn’t just due to chance or a bad statistical model but rather under-appreciation of growing risks in the market. In the Review of Financial Studies article, I document that, throughout the history of the VIX futures market, futures prices tend to fall below statistically fair forecasts as market risks grow, but that there is nevertheless a tendency for futures prices to subsequently move toward the fair forecasts. Most prominently, VIX futures prices fell below the fair forecasts on the eve of episodes spanning a rogue’s gallery of major market turmoil such as the 2008 financial crisis. Even in these episodes, futures prices subsequently adjusted upward as investors caught on to impending risks.

Investors in the VIX futures market were slow to appreciate the growing risks to the market as the coronavirus pandemic spread. That period of under-appreciation seems to have passed: VIX futures prices now exceed the statistical forecasts. Just weeks ago, the market didn’t think uncertainty would last that long, but now there are signs the market expects it to be with us for a while.

Ing-Haw Cheng is an associate professor of business administration at Tuck School of Business at Dartmouth College. This commentary is not investment advice.

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