MW This is the best time of day to trade stocks

By Mark Hulbert

In this profitable trading strategy, you buy at the market close and sell at the open

The U.S. stock market performs far better at night than during the day.

The performance of this so-called overnight effect has been so impressive that some researchers have taken to calling it the "grandmother of all market anomalies."

Consider the S&P 500 SPX, which gained 6.6% over the 12 months through April 15. A portfolio that was invested in the index exclusively during the overnight hours would have gained 6.8%.

In fact, more than 100% of the stock market's gains over the past year occurred when the New York Stock Exchange and the Nasdaq COMP were closed. The cumulative return of another portfolio that held the S&P 500 only during regular trading sessions would have been negative. (See the chart below.)

Night and day

This recent experience is in line with the longer-term record. A study from Elm Street, an advisory firm, found that over the 30 years from 1992 to 2022, "investors have earned 100% or more of the [market's buy-and-hold] return ... when the markets are closed, and ... have earned zero or negative returns ... when markets are open."

To be sure, these historical returns are hypothetical and do not take transaction costs into account. Exploiting the overnight effect would require you to buy a broad-market fund like the SPDR S&P 500 ETF Trust SPY at each session's 4 p.m. Eastern time close and sell at the next day's 9:30 a.m. Eastern time open - more than 200 round-trip trades per year.

Nevertheless, a back-of-the-envelope calculation suggests that those costs would deduct only about 1 percentage point from the overnight portfolio's returns. Many discount brokers allow for commission-free trading of S&P 500 ETFs, for example, with miniscule bid-ask spreads.

There used to be a couple of ETFs that undertook these myriad transactions for you: The NightShares 500 ETF focused on the S&P 500, while the NightShares 2000 ETF focused on the Russell 2000 index RUT. These two ETFs were closed in the summer of 2023. In an interview, Bruce Lavine, the former chief executive of NightShares, said he was unaware of any other exchange-traded product that does what his ETFs used to do.

Why the overnight effect exists

You shouldn't try to profit from a pattern, no matter how impressive its historical record, unless there's a plausible explanation for why it should exist in the first place. A recent study discovered such an explanation for the market's overnight effect.

The study, entitled "Overnight Post-Earnings Announcement Drift and SEC Form 8-K Disclosures," was conducted by Terry Marsh of the University of California, Berkeley and Kam Fong Chan of the University of Western Australia. They traced the overnight effect to the U.S. market's reaction to extreme earnings surprises, most of which are reported when the NYSE and the Nasdaq exchanges are closed.

A good illustration is the earnings surprise recently reported by Travelers Cos. $(TRV)$ In its earnings report released in the early hours of April 16, the company reported first-quarter earnings per share of $1.91, almost triple the consensus expectation. At the open that morning - several hours after this earnings surprise - the company's stock opened 2.5% higher than where it closed the day before. During the April16 regular session, in contrast, Travelers stock fell 1.3%.

To be sure, not all earnings surprises are positive, although the majority of them are. And even when a particular surprise is positive, its impact will be relatively small to the S&P 500 itself. Travelers, for example, has only about a 0.13% weighting in that index. This points to an important feature of the overnight-effect strategy: It represents the slow and hopefully steady accumulation of many surprises over long periods.

Note also that, because the strategy involves numerous short-term trades, its gains will be taxed at the higher short-term capital-gains rate. So if you're interested, you should pursue the overnight effect in a tax-deferred account.

The bottom line: The overnight effect is not a get-rich-quick scheme. But its historical performance, and its persistence even after becoming widely known, might be enough to make it worth considering - provided you have the patience and discipline to get into the market at every close and out again at the next session's open.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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April 23, 2025 17:01 ET (21:01 GMT)

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