Occasionally, just before laying down to sleep a new trading idea pops into my head, and I simply have to check it out right away. Just the other night the idea was very simple and led to some surprising findings. What would happen if I just let the stock market’s opening price determine if I was bullish or bearish from the open to the close for the day?
I tried lots of variations of the question and found that any strategy that only held a position during open hours didn’t do well. I thought to myself, “The market goes up overtime, but it seems to lose money during open market hours. It must make money during closed hours.” After testing secondary idea it seemed to check out. I started scouring the internet to find someone to back my findings up. I found a great article in the New York Times talking about the exact same thing I had just discovered myself.
From 1993 until February 2018:
- Holding stocks just during open market hours led to a -4.4% loss.
- Holding stocks just during closed market hours led to a 571% gain.
That is amazing! I had never heard of this affect. Unfortunately, I have yet to find a way to directly capitalize on this. Yes 571% > -4.4%, but buying and closing a position every single day is expensive. Plus when compared to just buying and holding over that same time period the 571% gain isn’t that impressive. Once you start to take commission, taxes, and slippage into account the result isn’t that impressive when compared to buying and holding. Even if I just had to spend $0.015 in commissions and slippage on each share of $50 ETF would result in yearly expense of about 15%.
I am going to see if the combination of this affect with other strategies can produce good returns but have had no luck so far. If you have any ideas don’t hesitate to share them. I would be glad to try testing them. The best use of this information right now seems to be that we can rest easy knowing that our money is actually safer and working harder when the market is closed.
P.S. Government bonds and stocks both tend to go up overtime, but one tends to do better when the other is not doing great. So, it is not surprising that my findings were the reverse for long term government bonds.