Buying the right stocks is important. Buying them at the right time is just as important.
And while normally after saying this I’d talk about seasonality… or buying when stock prices are at an irrational low and our indicators are bottomed out…
Today I want to talk about using historical data to pinpoint the best times to buy and sell in the very short term.
We have a lot of data at our fingertips at TradeSmith. With it, we can learn things like the right times to buy stocks and when to sell them… even down to the time of day.
And in a recent study of our market data, we learned something so incredibly valuable that it’ll change how you trade forever.
I’m not blowing smoke. Today I’ve got two mind-blowing charts that prove it.
As you’ll learn, one simple factor has made the difference between losing a lot of money… and making a lot of money in tech stocks.
It was the difference between treading water… and earning nearly 2,000% in the S&P 500.
And it was even the difference between suffering the bond bear market that started in 2020… and dodging it completely.
Now that I have your attention, let me show you what we found…
Never Buy Stocks This Way Again
If you’re buying stocks right when the market opens, you’re probably missing out on the best gains.
And if you’re selling stocks right before the market closes, you’re shooting yourself in the foot when it comes to maximizing your wealth.
I’ll get into why that might be the case in just a second.
Right now, just look at this…
The chart below shows the results of that simple strategy – buy when the market opens, sell when the market closes – using one share each in the SPDR Gold ETF (GLD); the Nasdaq 100 ETF, ProShares QQQ Trust (QQQ); the SPDR S&P 500 ETF (SPY); and the iShares 20+ Year Treasury Bond ETF (TLT). We’ll call this an “inside day” strategy:
(This chart comes directly from our backend database where we test out new ideas – if you’re wondering why this isn’t a TradeSmith Finance chart.)
Your eyes do not deceive you on these results. Going back to 1993, using this exact strategy on SPY (black line above) has made you an unacceptably lousy 9.4% on your money. That’s compared to a 1,195% return from just buying and holding SPY.
It’s even worse with QQQ (green line). By buying the open and selling the close in tech stocks, you actually lose 55% since the ETF launched in 1999. Meanwhile, buy-and-hold on QQQ has earned 813% since inception.
With gold (blue line), you’re also flat – compared to a return of 443%.
And with bonds (yellow line), you made about 110%. (That, as it turns out, is the right strategy for bonds. The buy-and-hold return is just 19.1% – with most of the returns being wiped out when the bond bear market started in 2020.)
So, what does this tell us? It tells us that for stocks and gold, the last thing you want to do is buy when the market opens.
This is huge. Plenty of people buy stocks when the market opens. It’s a natural instinct. I’ve done it, and I’m sure you have.
Not only that: Lots of people sell before the close – especially if stocks are up that day. But over the long-term that’s a grave error.
Especially when you look at this chart of what happens when you buy the market close and sell the following morning. It’s an “outside day” strategy:
The difference is clear.
With QQQ (green line), you go from losing 55% to making 2,231% over the same time span. With SPY (black line), you go from making 9.4% to making 1,860%. Also note both of those returns beat the buy-and-hold return of each ETF handily.
With GLD (blue line), you go from making 0.4% to making over 410% – though, that’s still shy of the buy-and-hold return of 443%.
And with TLT, you make about the same as you would a buy-and-hold strategy (yellow line). Here again, we can see that bonds are the one asset you want to hold through an “inside day,” since this is the one asset of the bunch where returns were much better this way.
This blew our minds when we ran the numbers on this. How can such a simple shift in how you trade assets make such a meaningful impact?
The answer is simple: overnight gaps from the futures markets.
The Impact of Futures on Stock Prices
You’ve probably noticed that stocks open at a different price from where they closed the previous day. Sometimes lower, but usually higher.
That’s because of the futures market – a derivative of stock indexes that determines their opening price.
Round the clock, advanced traders buy and sell futures contracts that pay out depending on where stocks are trading by a certain time. More than that, the action in these markets determines where stock prices open each trading day.
Stocks have a generally bullish bias. That is, they go up most of the time. So, it’s not a stretch to determine that futures – that is, bets on the direction of the market – go up most of the time, too.
So what happens is, these futures cause stock prices to gap up between one session and the next.
Just look at this daily candlestick chart of the S&P 500. You can clearly see the gaps between one close and the next:
In the first red circle, stocks gapped down about 0.4% – from the top of the green candlestick (the close) to the top of the red candlestick (the open).
In the second green circle, the opposite happened. Stocks gapped up about 0.6% from bottom of the red candlestick (the close) to the bottom of the green candlestick (the open).
These gaps are where the big money is made. Because stocks gap up most of the time, buying the close and selling the open means you’re exposed to none of the intraday movements and all of the overnight movements in the futures market.
Keep this in mind whenever you buy or sell a stock, especially if you’re trading ETFs on the major stock market indexes. The best time to buy is the close, and the best time to sell is the open. And over time, the impact of trading this way is substantial.
Bear in mind, this effect likely won’t be prominent in every single stock out there. Remember, we tested the S&P 500 and the Nasdaq 100 – so these are large-cap stocks we’re talking about.
Also be mindful of the fact that, when trading bonds, trading intraday has been the right move to make.
But either way, this is a factor of the markets you have to understand. Stop buying when the market opens and stop selling when the market closes. Your future wealth will thank you for it.
All the best,
Keith Kaplan
CEO, TradeSmith
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Source: TradeSmith