A quirky post-crisis stock market trend has flipped: Morning Brief

Wednesday, April 8, 2020

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Buying the open and selling the close is making money

In the coronavirus market, it seems like up is down and down is up.

As we noted yesterday, earnings forecasts from Wall Street analysts have moved from just about the most uniform on record to the most disparate.

The economy went from historically stable to facing the deepest recession on record.

And even an oft-overlooked quirk in the market’s daily action has completely reversed the pattern that has endured for most of the last 30 years.

In a note to clients over the weekend, analysts at Bespoke Investment Group observed that buying the market open in the SPY ETF (SPY) that tracks the S&P 500 and selling the close would’ve actually seen investors gain about 6% year-to-date (through Friday’s close). Buying the close and selling the open, in contrast, would see an investor down over 28%.

During regular trading hours the S&P 500 has actually been up so far this year. It is the overnight futures session that has really crushed investors during the coronavirus sell-off. (Source: Bespoke Investment Group)

On the surface, this might seem somewhat unremarkable. Many folks who follow markets closely will remember the “overnight futures gap down” headlines that seemed to come almost daily in mid-March.

And so perhaps it is not a huge surprise that the data confirms most of the pain in this market is being inflicted by overnight futures trading and the resulting gaps at the next day’s open. That is what this period has felt like.

But the bigger challenge this trend poses for investors is that it is the exact opposite of what has prevailed over the last few decades.

“If we go all the way back to 1993 when SPY began trading, we see that all of SPY’s gains over this time frame have come outside of regular trading hours,” Bespoke writes.

“That is, if you bought SPY at the close every trading day and sold it at the next day’s open, you’d currently be up 500%. If you did the opposite and instead bought SPY at the open every trading day and sold at the close, you’d actually be down 6.8%.”

The overnight gaps in markets have long been an investor’s friend. This quirk in the S&P 500’s returns has been known for years. It is part of what informs the old market adage that dumb money sells the open and smart money buys the close.

And that this trade is not only not working but in fact underperforming both the opposite strategy and the broader market shows just how much pressure consensus views of all sorts are coming under pressure in this environment.

After a big rally in the final days of March, it seemed like a uniform view that stocks would eventually re-test their March 23 lows. And maybe they will. But from its recent low the S&P 500 is up over 20%.

Bringing to mind another old market cliché that seems relevant right now — the goal of the market is to inflict as much pain on as many people as possible.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

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