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“Buy the close, sell the open” still rewards for carrying overnight risk

US stocks opened the day and the week lower by a little over half a percentage point, but they rallied in November. With two other trading days left in the month and ahead of December, it is worth having a detailed look at how stocks performed during and after the regular, official trading hours.

The regular trading hours in the United States are between 09:30 AM and 04:00 PM ET. However, one can trade stocks after hours, even though liquidity is thinner.

According to an article in Financial Times, algorithmic trading is responsible for buying shares sold during regular market hours and selling them when the markets open the next day.

The pattern led to overnight returns much bigger than during the regular market opening hours. More precisely, the “buy the close, sell the open” strategy is now up +1100% since 1993.

Effectively, traders and investors are rewarded for carrying overnight risk.

On the other hand, “buy the open, sell the close” delivered negative returns over the same period.

European market openings are responsible for large positive average returns

Returns tend to spike between 02:00 AM and 03:00 AM in New York. More exactly, when European traders start working, US stocks enjoy an upward drift.

Another reason US stocks outperform after hours is the schedule of US corporate earnings. Some 25% of US companies report their earnings after the market closes.

Moreover, about 60% of the companies report their quarterly earnings before stocks start trading in the early American session. Because most companies beat the estimates, we have another explanation of why stocks outperform outside the regular trading hours.

All in all, trading financial markets requires a complete understanding of all everything that might move markets. So is this just another market anomaly?  

Regardless of it, carrying overnight risk has rewarded investors in the last two decades.

The post “Buy the close, sell the open” still rewards for carrying overnight risk appeared first on Invezz.

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