S&P500 Futures continue Strong performance
Financial markets evolved dramatically since the Personal Computer (PC) and the Internet reduced the transactional costs, as such retail investors flooded the market. Nowadays, most of the trading is done via complex algorithmic trading and computer models that follow the price action by trying to profit from the slightest market change.
Due to the continuous news flow from around the world that impacts the broad financial market, there is always a market open to place a bet on, albeit during the trading week hours. In other words, trading the equity market in the United States does not stop when the cash market closes, but continues via the futures market.
Most of the Market Advance Comes in After Closing Hours
An interesting comparison between the cumulative returns generated during or outside regular hours reveals a staggering difference between the two. Tracking the SPY (an ETF – Exchange Traded Fund – that follows the S&P500 broad market index) performance for more than 25 years reveals that the index outperformed during outside regular hours while remaining flat during regular hours.
In plain English, if one would have bought the S&P500 every day at the cash market close and sold at the cash market open’s next day, the return for the past 25 years would have almost reached 600%. Repeating the process but for the regular trading hours would yield close to zero. Moreover, most of the time, during that period, the investor would have had a negative return.
What causes such a discrepancy between the interval hours when the US market is closed or open? Economic models for long studied market anomalies that worked throughout the years until they were arbitraged away. For example, the January effect, when portfolio managers sell the riskier positions at the end of December for better reporting and tax purposes, and buy them back at the start of the new year. The research revealed that inconsistent returns were obtained from this market anomaly.
However such a discrepancy in returns is difficult to ignore. If the securities markets are efficient, the difference would be already speculated (arbitraged away). Yet, after more than two decades, it has not, and the explanation may come from the difference between the futures and the cash markets.
For the general investor, however, the two are the same – brokerage houses even use continuous data on the same chart, making it virtually impossible to distinguish between the two.
Can this be the biggest market anomaly overlooked by investors?