Tuesday, September 09, 2014

First And Last Hour Trading Is a Stupid Gimmick

Stupid ideas frequently pop up on my radar whenever I troll the depths of the Internet for investment knowledge.  Some ideas just don't belong in the realm of sensible investing.  Trading for advantage in either the first or last hour of an equity market's trading day is one such bad idea.  

Quickly perusing the top articles in a web search of "last hour trading" reveals that the concept relies heavily on folk wisdom, technical analysis, and gut feeling.  None of those forces incorporate any fundamental analysis of a stock's underlying value.  All of them play to emotions that get investors in trouble.  The ETF revolution isn't helping here because day traders just use them as more random playthings.  

Here's an illustration of just how dumb traders can be with hourly trading stats.  The so-called smart money index gained popularity in the 1990s because it supposedly compares morning trades to evening trades.  The index proceeds from a basic construction flaw.  It is impossible to set a normal baseline value for the index because it begins with a previous day's close.  That one flaw is enough to invalidate any claims to validity.  It gets even dumber by assuming evening trades are more rational, as if intraday news doesn't move prices and large institutions with internal crossing networks aren't jamming the close.  Sheesh.  

NASDAQ's Extended Hours Trading data display does the investing public a disservice by feeding traders' appetites for this nonsense.  It formalizes the baseline construction flaw I identified above.  The exchange's Pre-Market Indicator (PMI) and After-Hours Indicator (AHI) offer little proof that they are reliable sentiment estimates.  What's the baseline value for these numbers?  Where's the historical data for each indicator, so we can compare sentiment changes to the NASDAQ's turning points?  What's the date where they start at zero?  This data is absent.  These indicators are just voodoo.  

Advocates of short-term trading in first hours, last hours, after hours, or any other hours bear a burden of proof that their concepts add value.  Day traders should produce an audited portfolio that consistently outperforms market benchmarks over time using these hourly strategies.  Hedge funds running HFT use nanosecond trading strategies and even they can't outperform the market over time, net of fees.  The myth that traders can gain pricing advantages by focusing on hourly trading flows persists with no peer-reviewed data in its favor.  First and last hour traders are losers.