I was surfing the Web and came across a stock-market study* that foundgains in the S&P/TSX Composite since 2001 have tended tooccur overnight, not during the trading day.
That is, if you had bought at the end of the trading day and sold at the beginning of the next trading day, your capital would have grown by 11.3% per year, before transaction costs. If you had done the opposite — buy at the beginning of the trading day and sell at the end — your capital would have depreciated by 3.9% per year. A simple buy-and-hold approach would have delivered an annual gainof 4.1%.
The overnight effect arises because TSX openings are particularly strong while closings are rather weak. One possible explanation is that the overnight investor is getting paid for the uncertainty of the off-hours. People like to buy when the market opens and sell before it closes to minimize exposure to the risk of adverse events occurring after hours.
For investors, this suggests buying their stocks late in the day and selling them early in the day. It can add a few more percentage points to their annual gains.
High-frequency traders might consider trying to arbitrage the overnight effect by regularly selling on the open and buying on the close. But the study finds even the lowest of retail-level commissions eat up the gains from making 2 trades a day (500 a year).
A possible exception could be using a leveraged ETF, likethe Horizon BetaPro HXU, and making trades through the order book (liquidity providing)at a trading broker like Interactive Brokers — especially during periods of high volatility in the market (when the overnight premium is higher). But this is a still a chancy proposition that assumes everything goes well with the executions.
Persistance of theovernight effect
One reason why the overnight effect persists is that liquidity and market-impact constraints prevent large investors from discounting the overnight premium. Buying at the end of the day is hard for them because of the relatively low trading volumes in the afternoon and toward the close.
* The Mysterious Case of Stocks In The NighttimePeter Gibson and John Evans, CIBC World Markets Inc.