Thinking Of Selling Everything Before The Close? Don’t Pull The Trigger Yet!
One of the ongoing debates that we’ve all heard over the years is whether or not
one assumes too much risk by holding positions overnight. Is it better to go
home flat at the end of the day, therefore avoiding all the crazy possible
events which can occur when the market is closed? No Al-Qaeda, no terrorist
attacks, few–if any–economic reports to be concerned about…simply exit the
positions and start fresh every day.
For pure day traders, it’s a no-brainer. Day traders are out no matter what.
But, what about everyone else? What about those of us who are in a position and
asking whether or not it’s worth the risk to hold it overnight?
This week, I’m going to share with you over 12 years worth of results which may
open your eyes.
The Test
We went back to 1993 and looked at the SPYs since they first started trading.
From 1993 – May 20 2005, the SPYs have risen from just above $43 per share to
just above $119 for a total of approximately 76 points, (which is a very nice
bull move). We ran two separate tests: The first test had us buying the SPYs on
the open each day and selling them on the close (therefore taking no overnight
risk). The second test had us buying on the close each day and exiting on the
open (therefore assuming full overnight risk). How do you think the results
proved out?
Well, if you listen to the individuals who hate overnight risk, you’d likely say
that the market gains came during the day and the overnight risk ate into the
gains. But, in reality, the results are just the opposite (and somewhat
shocking).
The Results
If one had bought the SPYs on the close over the past 12 years and sold them on
the next day’s open, they would have made 143 SPY points (plus, they would have
also received all the quarterly dividends). And had one bought the SPYs on the
open each day and sold the position on the close, how would they have done?
They would have lost money! How much? A little more than 67 points. Yes, in
spite of a solid upward move in SPY prices, the intraday move–on a net
basis–was negative! All the gains, and a great deal more, came from holding the SPYs overnight. And then a good chunk of these gains were lost while the market
was open.
What Does This Mean?
First, just a reminder that the above test results are simulated and it cannot
be assumed that the results will be the same in the future. Also, one cannot
trade this outright because of the transaction costs.
With that said, the results show that at least from 1993, the S&P 500 index
market participants have been more than amply rewarded for holding positions
overnight. Does this mean that day trading doesn’t work? No, of course not.
There are many successful daytraders and they are succeeding for a multitude of
reasons, including shorting the market at appropriate times. But, the long side
of the S&P 500 has provided no positive edge to day traders on an open-to-close
basis since 1993. The long edge (and this edge has been substantial) has gone to
those holding positions overnight. And these overnight holdings have included
9/11, the Long Term Capital/world financial crisis in 1998, the war with Iraq,
multiple major political events, corporate scandals, economic reports, and a
whole slew of other things which cause fear in most everyone. And, it appears
that these fears have created a continuous mis-pricing of the market and this
mis-pricing has allowed for overnight holders to be well rewarded.
TradingMarkets Professional Options Trading College
I’m very happy to announce that Joe Corona will be the head instructor of
our new
TradingMarkets Options Trading College. For those of you who don’t know
Joe, he was “Market Wizard” Tony Saliba’s head trader for nearly four years and
he previously traded on the floor of a number of the major exchanges. Joe now
runs a firm which trades options and derivatives in US, European and Asian
markets.
I’ve twice had the chance to see Joe in action while he was running Tony’s desk
and it’s quite an experience to watch someone of his magnitude in action. There
are very few traders in the world who have been trading options successfully for
more than 20 years and Joe is one of them. If you would like more information on
Joe’s options course, you can
find it here or you can call 1 888 484-8220, ext. 1.
Summary
Should you hold a position overnight (especially a SPY position) simply for the
sake of a past edge? No, I don’t believe so. These test results do show,
however, that contrary to popular belief, from 1993 – May 2005, the gains
have occurred while the market has been closed, not while it has been open. If this holds true in the future, it may help you sleep a lot
better while you’re carrying your positions overnight.
Have a great week trading (and enjoy the 3-day holiday weekend)!
Larry Connors