The Tell: It’s overnight and afternoon trading that drives the U.S. stock market

Monday’s bruising day may have rattled nerves on Wall Street, but the hour-by-hour trading pattern, while amplified, wasn’t that different from all the other days over the past decade.

Eric Hunsader, the founder of trading analysis firm Nanex, calculated the change in price of e-mini S&P 500 futures ESU5, +0.60%  by the hour. The chart below shows that overnight, people bought e-minis only to sell them during the day.

Hunsader repeated this exercise going back a decade, and the resulting chart invites more questions than it answers:

E-mini futures have the advantage of being tradable 24 hours a day, and the charts suggest most of the buying action happens overnight—between midnight and 4 a.m. Eastern—and in the afternoon.

The most puzzling piece of this jigsaw surrounds morning trade in New York. That’s when traders tend to sell.

“I don’t have any straight answers as to why this happens. One possible explanation is that people react to news and sell in the morning. In contrast, the afternoon action is a reverse of the morning—with most trading resulting in positive price change,” Hunsader said.

“The other remarkable thing about this chart is that the financial crisis broke the previous pattern. Since the crisis, people who trade in the morning are still selling,” he said.

Since most people in the U.S. are sleeping during the overnight hours, the logical explanation points the finger at foreigners. Alternatively, it could be companies with foreign subsidiaries and a lot of spare cash that are doing the buying.

We invite readers and technical analysts offer any other explanations.

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