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I saw a tweet from the Chief Investment Strategist of Charles Schwab that said the following:

Since 1993 from @bespokeinvest :

Buying SPY at open & selling at close every day (ie, only holding it during trading day): -13.9% return

Buying SPY at close & selling at next open (ie, only holding it after-hours): +634.2%

It included the following graphic:

enter image description here

Why has the S&P 500 generated such a massive gain since 1993 during the overnight hours (4pm to 9:30am), and has an overall loss during normal trading hours (9:30am to 4pm)?

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    All of the existing answers are getting at the "fundamentals" that ultimately cause this pattern. But none of them address the natural sub-question "Why haven't any investors noticed this non-random pattern, executed an automatic investment strategy to exploit it, and neutralized it?"
    – tparker
    Commented May 14, 2020 at 2:54
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    @tparker - No one addressed that sub-question in their answers because it wasn't asked.
    – Bob Baerker
    Commented May 14, 2020 at 3:47
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    @BobBaerker It seems to me that that question is implicit in any apparently exploitable regularity in stock market behavior, but I guess that's a matter of opinion.
    – tparker
    Commented May 14, 2020 at 3:56
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    I will also point out that the cumulative nature of this chart hides the real truth - perhaps on most days, overnight results exceed intra-day results, but on many days, the reverse is true. You can see this in the chart when the difference between the two lines tightens, but it is not intuitive, and makes it look more like a 'sure thing' that overnight investing always wins. This downplays the risk of trading on this as a general strategy.
    – Grade 'Eh' Bacon
    Commented May 14, 2020 at 13:39
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    @tparker My answer does address that, because I point out that the effect is to be expected in equilibrium, on the basis of the risk and interest cost of holding overnight. It is not an "exploitable regularity" because attempting to exploit it (buy buying at the close and selling at the open) would earn only fair compensation for that risk/cost (also transaction costs). That is, it's consistent with an efficient-market equilibrium of risk and return. It's like asking whether the well-known long-term return advantage of riskier stocks over safer bonds is an "exploitable regularity".
    – nanoman
    Commented May 14, 2020 at 23:39

3 Answers 3

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A couple of possible reasons:

  1. A disproportionate amount of stock-market risk (e.g., scheduled economic and earnings releases) happens outside market hours, with the goal of avoiding destabilization of the market. (Extended-hours and futures trading are typically occurring, and show the immediate impact, but the regular-hours SPY does not.) Thus, overnight returns should be commensurate with the risk.

  2. Interest (either on positive cash balances or on margin debt) is calculated daily on overnight balances regardless of intraday fluctuations. Thus, day trades have zero cost of capital and their return is lower to compensate.

I once read a suggestion that a countervailing mechanism explains the suppression of this tendency in parts of the 1990s (i.e., somewhat weaker overnight and stronger intraday returns): As Japan endured an extended bubble-deflating bear market, US morning futures and opening markets were often depressed in sympathy with the overnight Nikkei but then rebounded during the trading hours of bullish US investors.

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  • I like your reason #1. I am not sure how interest would result in much greater overnight returns though.
    – 7529
    Commented May 13, 2020 at 0:36
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    @7529 Not a big factor right now when rates are close to zero, but when rates were ~5%/yr it would add to the temptation for traders to sell their positions by the close, earn more (or pay less) interest overnight, and buy again tomorrow. In the resulting equilibrium, overnight returns had to become more lucrative to justify the cost of capital.
    – nanoman
    Commented May 13, 2020 at 0:48
  • Most people hold stocks without margin though, so no interest is involved. If they are buying on margin, their return will be more lucrative just from the fact that they have invested more than 100% of their cash.
    – 7529
    Commented May 13, 2020 at 18:24
  • @7529 Even without margin, brokers often pay interest on cash (e.g., by sweeping into a money market fund) -- granted, at lower rates than they charge for margin. So either way, holding a stock overnight means losing on overnight interest (this is what I mean by "cost of capital"). When you say "their return will be more lucrative", the issue is the return from an incremental dollar investment. No matter what position size they already have, holding an additional dollar overnight in stock instead of cash gains them the stock return on the dollar and costs them the interest on the dollar.
    – nanoman
    Commented May 13, 2020 at 20:09
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    My two cents: The number of non-business hours (night, weekend, holiday) is like 4× the number of trading hours (09:30~16:00), so it's a reasonable first assumption that more risk happens during those hours.
    – Nayuki
    Commented May 13, 2020 at 22:43
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Per the request above:

The market reacts to overnight news which includes after hours earnings announcements, economic reports, overseas trading, etc. (very, very few companies announce earnings during regular hours trading). Because of these, the market tends to gap up or down in the morning. In a long term bull market, those gaps are net positive

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The following items could play a factor:

  1. Intraday margin is higher (e.g. 4x leverage for intraday but 2 x for overnight), causing people to buy at the open (push the price up) and sell at the close (push the price down). While people could also use intraday margin to create short positions, in general there are more long buyers than short sellers.

  2. Many investors are afraid of 'gaps'. For example that the market 'gaps up' or 'gaps down' between the close and the open, so may want to close out their positions at the end of the day to avoid those risks.

  3. Many of the great crashes have occurred intra-day.

  4. By employing this strategy over 26 years you are only gaining 20% greater return overall - that is less than 0.7% better per year on average. This kind of improvement could be eaten by bid-ask spreads and transaction costs at the close and the open. It is not clear what methodology was used to determine the prices. If the midpoint was used, that would not take into account transaction spreads.

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  • (1) More long buyers than short sellers during the day contradicts the idea that holding intraday under performs. (4) Even if B/A spreads ate up a chunk of the 20% overnight gain, there would be the same affect on the lagging intraday performance and the degree of outperformance of overnight versus intraday would remain. IOW, both would be worse due to what should be similar slippage.
    – Bob Baerker
    Commented May 13, 2020 at 11:34
  • @BobBaerker (1) not really. Due to margin rules buyers or sort sellers have to sell by the close, even if it means a loss. (4) true, but "full-day" could also be achieved with buy-and-hold over the entire period without any loss to spreads/slippage.
    – xirt
    Commented May 13, 2020 at 22:16
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    I think that you have wandered away from the premise of the question in several ways. Only Pattern Day Traders who are using the allowable 4x intraday margin "have to sell by the close, even if it means a loss". They must drop down to 2x margin, aka Reg T 50% so it's only a partial close. At 4x margin intraday, they get 4 times the gain or 4 times the loss. But given that the intraday gain severely lags the overnight gain, it's irrelevant because everyone in the intraday camp has to sell at the close regardless of margin or not. This is all not admissible as evidence.
    – Bob Baerker
    Commented May 14, 2020 at 3:43
  • cont. - Yes, full-day could also be achieved with buy-and-hold over the entire period without any loss to spreads/slippage". What does that have to do with the OP's premise of intraday hold versus overnight hold, with no hold beyond those time periods? Again, not admissible.
    – Bob Baerker
    Commented May 14, 2020 at 3:45
  • @BobBaerker [A] Agreed some people may hold 2x positions overnight and increase to 4x during the day. It is the additional 2x that they have to sell. The existing 2x could be from the day before. [B] The line shown for full day performance is identical to the line if you bought and held for the time period, clearly showing slippage is not taken into account. [C] Having to sell at the close puts acute downward pressure on the price, which might otherwise be supported by the market.
    – xirt
    Commented May 14, 2020 at 22:36

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