Timing is everything in the stock market. Buying at the wrong moment is the difference between making money and getting burned.
So, what if you knew exactly when all the biggest gains happened almost every single day?
Well, we can’t be that exact. But this chart, shared by researcher Rich Kleinbauer on Twitter, gets us pretty close. It turns out that all the biggest gains in the U.S. market happen simultaneously: overnight.
For almost 20 years, the stock market has returned a big fat zero during daytime hours.
The vast gains have all come in after-hours trading on the futures market.
The intraday movements have much more volume and noise, but nothing much actually happens. The trend and direction of the market are decided while you’re asleep. As Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, said :
“Over history of SPY (back to 1993), nearly all gains have been outside regular hours.”
The market’s opening hours are often marked by heightened volatility as investors react to overnight news and events. This creates opportunities for skilled traders, but it can also pose significant risks for less experienced traders.
The first 15 minutes after the market opens typically experience the most dramatic price movements of the day. For seasoned traders, this volatility can be highly lucrative; however, it can be daunting for beginners.
If you are new to day trading, avoiding these chaotic early hours or limiting your exposure during this time may be wise.
In contrast, the middle of the trading day tends to be calmer and more predictable. By now, the most significant news has already been reflected in asset prices, providing a less chaotic environment for novices to make trades. This period can be ideal for beginners looking to build confidence.
As the trading day nears its close, the last hour often sees a resurgence of volatility and increased trading volume. Traders may rush to close out positions or capitalize on late-day rallies, creating potential opportunities for those with experience.
By understanding these trading patterns and adjusting your strategy accordingly, you can enhance your chances of success in the dynamic world of day trading.
Early morning trading presents high volatility and significant potential for experienced traders, while mid-day offers a calmer atmosphere more suitable for beginners. Late-day trading, while more unpredictable, can also present valuable opportunities for those ready to seize them.
Some investors believe certain days of the week yield better returns, but evidence supporting this is limited. The “Monday effect” suggests that stock markets often decline on Mondays, possibly due to negative news released over the weekend or investors’ reluctance to return to work.
While this effect has diminished significantly, data shows that from 2000 to June 2023, Mondays generally recorded negative returns for the S&P 500 . Nonetheless, Monday could still present opportunities for bargain hunting.
Thursday or early Friday may be optimal for selling stocks, as prices often dip afterward. If stock prices rise, short sellers might find Friday a suitable day to enter positions, while Monday could be ideal for covering those shorts. Notably, Fridays before three-day weekends tend to see positive market movements.
Seasonally, March, April, and July yield substantial returns, along with October to December. The “January effect” indicates that investment activity often surges at the beginning of the year, especially in small-cap and value stocks. However, its impact tends to fade as it becomes widely recognized.
Conversely, September is generally a challenging month. It is known for the “September effect,” where poor returns are linked to institutional investors wrapping up their third-quarter positions. Therefore, some traders prefer selling in September.
While October usually averages positive returns, it has also been associated with major market crashes, making September a potentially safer time to sell stocks to avoid October’s volatility.
After-hours trading refers to the buying and selling of stocks and exchange-traded funds (ETFs) outside the standard market hours, which for the New York Stock Exchange (NYSE) and Nasdaq are from 9:30 a.m. to 4 p.m. Eastern time.
This trading period allows investors to react to news and data releases after the market closes, facilitating transactions through electronic communication networks (ECNs) rather than traditional exchanges.
Due to fewer participants in after-hours sessions, liquidity is often lower, resulting in increased volatility and larger price movements on reduced trading volume. This dynamic can create both opportunities and risks for traders.
Major stock exchanges follow defined trading hours, but trading activity continues before and after these periods. The after-hours market runs from 4 p.m. to 8 p.m. ET, while pre-market trading takes place from 4 a.m. to 9:30 a.m. ET.
During these times, market behavior shifts, with price changes in after-hours trading carrying the same weight as during regular trading hours.
For example, if a stock’s price drops from $10 to $9 during the regular session but rises to $10.50 in after-hours trading, an investor would technically be down $1 during the day but up $0.50 in after-hours.
However, it’s important to note that the next day’s opening price may not reflect the after-hours movement. If negative sentiment emerges from a quarterly earnings report released after hours, the stock could open significantly lower, highlighting the risks involved.
To navigate the after-hours market effectively, traders should place limit orders instead of market orders due to the wider bid-ask spreads and heightened volatility. This ensures greater control over the price at which shares are bought or sold.
Traders are often motivated to engage in after-hours trading to react to significant developments, such as earnings reports or market-moving news.
For instance, a trader holding a long position might prefer to sell at a less favorable price after hours rather than risk more considerable losses by holding the position overnight.
However, after-hours trading carries risks. One of the main challenges is low liquidity, meaning fewer buyers and sellers are active during this time, making it harder to execute trades at favorable prices. This can also increase price volatility, with sharper price movements than during regular trading hours.
Price uncertainty is another risk, as the quotes available during after-hours trading are typically provided by a single electronic communication network (ECN), rather than reflecting the best consolidated market prices. Wider bid-ask spreads are typical, affecting the price investors pay or receive for a stock.
Moreover, professional traders with more experience and sophisticated tools often dominate after-hours trading, creating a more competitive and potentially riskier environment for less experienced investors.
Some brokers also restrict after-hours trading to specific order types, like limit orders, which increases the likelihood that trades won’t be executed.
Nobody can pinpoint exactly why, but there are a few theories.
First, there’s much thinner volume in the after-hours futures market. It’s easier for big players to push the market in a particular direction when all the noise of the day is over.
Second, all companies release their earnings reports before or after the market opens. These often trigger massive price movements outside of regular trading hours.
Third, we live in a global world where Asian and European traders have overnight access to U.S. futures markets.
Fourth, and maybe most controversial, is that central banks use the overnight markets to inject liquidity.
The same is true for the downside. All the biggest losses happen overnight when the stock market enters a bear market.
We saw this play out in March 2024 when the S&P 500 dropped more than 30%.
Here are the biggest S&P 500 movements.
Event | Movement | Cause |
---|---|---|
Black Monday (Oct. 19, 1987) | S&P 500 dropped by 21% in a single day. | Panic selling, algorithmic trading, and overvaluation concerns. |
Dot-com Bubble (2000-2002) | S&P 500 lost nearly 50% from its peak in 2000 to its trough in 2002. | Excessive speculation in internet-based companies, market correction after years of overvaluation. |
Financial Crisis (2007-2009) | S&P 500 fell by about 57% from its peak in October 2007 to March 2009. | Collapse of Lehman Brothers, subprime mortgage failures, and global credit crisis. |
COVID-19 Crash (February-March 2020) | S&P 500 dropped nearly 34% in just over a month. | Outbreak of the COVID-19 pandemic, economic shutdowns, and fears of a prolonged recession. |
Post-COVID Recovery (2020-2021) | S&P 500 gained over 100% from its March 2020 low to new highs by the end of 2021. | Massive monetary stimulus, low interest rates, strong growth in tech stocks, and government spending. |
Global Financial Stimulus (2021) | S&P 500 climbed over 27% during 2021. | Continued stimulus, strong corporate earnings, and optimism about economic recovery. |
2022 Bear Market | S&P 500 dropped over 20% in the first half of 2022. | Rising inflation, aggressive interest rate hikes by the Federal Reserve, and concerns about a potential recession. |
2008-2009 Global Financial Crisis | S&P 500 dropped 57% from October 2007 to March 2009. | Cascade of financial failures, particularly in the housing market and major financial institutions. |
If you track market movements long enough, you see some patterns. The after-hours action is just one of them.
Another is weak action right at the end of the day. Market technician J.C. O’Hara at FBN Securities ran the numbers back in 2015 and found something unusual about trading at the end of the day:
“If you were just to buy the last half-hour of each day, you’d be down 2 percent [even in a bull market],” he said.
Market experts Alessandro Dicorrado and Steve Woolley recall a quip from a UK-based fund manager: “If you have to give a numerical forecast, never give a date. If you have to give a time-based forecast, never give a number.”
This remark humorously captures the immense difficulty of precise forecasting in financial markets—despite the legions of economists, analysts, and strategists who dedicate their careers to the task.
The reaction may defy expectations even if you could predict an event with perfect foresight. In other words, successfully trading on even the most accurate forecasts can be incredibly difficult.
This is because making money from predictions requires both an accurate forecast and one that differs from the consensus—a feat that’s harder than it seems, especially in macroeconomics and politics.
Estimating where market consensus lies is highly imprecise, whether it involves predicting reactions to election results, interest rate changes, or key economic data like inflation and job figures.
Forecasting can fail dramatically, as two major events in 2016 demonstrated. After the U.K. voted to leave the European Union in June that year, the consensus was that U.K. stocks would plummet.
Contrary to these expectations, after initial drops, both the FTSE 100 and FTSE All-Share indices were trading higher within a week and continued to rise throughout the year, gaining an additional 10%.
Similarly, when Donald Trump won the U.S. election later that year, it was expected to impact value stocks, including those in global portfolios negatively. Instead, value stocks rallied strongly, especially in sectors like industrials and financials, leading to significant portfolio outperformance in the final quarter of 2016.
“While there is value in company-specific forecasting—particularly for financial metrics or corporate actions—the unpredictable nature of macroeconomic forecasting is a reminder to approach cautiously. And if we ever venture to give a numerical forecast, just don’t ask us to attach a date,” Dicorrado and Woolley said.
Additional reporting by Ben Brown.