Stock Trading—First Half Hour vs Last Half Hour

Credit: @BarChart; read more patterns here

In technical analysis, the open and close price of a market/stock price are important.  For example, Candlestick Analysis is mostly focused on the relationship between the open and the close. The open reflects the reaction to news overnight or pre-market.  The close reflects the reaction after the open. In general, a move higher after a weak open is positive and a move lower after a strong open is negative.  As a rule of thumb, you can use Candlestick to:

• Look for bullish hollow red at the market bottom
• Look for bearish solid black at the market top

In this article, we will discuss the significance of first half hour in the opening and last half hour in the closing of stock trading.

Accumulation and Distribution

Here we will use Accumulation/Distribution as general terms (vs. a momentum indicator), which means whether investors are generally "accumulating," or buying, or "distributing," or selling, a certain stock.

Some analysts use $NYUPV:$NYDNV to identify a major accumulation day (MAD). These are days when up volume on the NYSE is at least 9 times larger than down volume.  Similarly, you can use $NYDNV:$NYUPV to determine a major distribution day too.

Dumb Money vs Smart Money

As Randy Frederick has pointed out:

where dumb money means average individual investors and smart money means big institutional investors and mutual fund companies.

First Half Hour vs Last Half Hour

Mark W. Yusko has also pointed out the significance of trading the first half hour (i.e., dumb money) vs trading last half hour (i.e., smart money):

Furthermore,  Liz Ann Sonders has commented that different returns could result from your investments on SPY if you:

• Bought on open and sold on close each day
• Bought on close and sold on open next day

However, this could not be a winning investment strategy for individual investors because the trading fee you pay will be a large lump sum too.

Wrap-up

In [1], Jesse Felder has explained how Smart Money Index works and what has changed after corporate's buybacks and passive investments via ETFs:

• The Smart Money Index simply represents the difference between the first 30 minutes of trading and the last hour. 
• Due to the corporate buybacks
• Considering buybacks are prohibited during the final half hour of trading, corporate demand for equities only occurs early in the day.
• Due to the popularity of ETFs
• The vast majority of trade volume now occurs during the last half hour of trading as passive and other systematic vehicles perform their daily balancing acts needed to match their benchmarks.

References

1. What’s Behind The Rapid Plunge In The ‘Smart Money Index’?

Technical Analysis—Percent Above Moving Average

The percentage of stocks trading above a specific moving average (or the degree of participation) is a breadth indicator that measures internal strength or weakness in the underlying index.

The 50-day moving average is used for the short-medium term timeframe, while the 150-day and 200-day moving averages are used for the medium-long term timeframe.

Signals can be derived from overbought/oversold levels, crosses above/below 50% and bullish/bearish divergences.

$SPXA50R

$SPXA50R  (S&P 500 %Above 50-day SMA) is a breadth indicator that measures the degree of participation and is used for the short-medium term timeframe.

Participation would be deemed relatively weak if the S&P 500 moved above its 50-day moving average and only 40% of stocks were above their 50-day moving average. Conversely, participation would be deemed strong if the S&P 500 moved above its 50-day moving average and 60% or more of its components were also above their 50-day moving average.

On 12/15/2018, $SPX (2560) is way below its 50 DMA (2730) and $SPXA50R is 24.60. In [1], Bespoke Investment Group, use $SPXA50R to monitor internal strength or weakness in the S&P 500 index and they classify the degree of participation into 5 zones: Extreme Overbought, Overbought, Neutral, Oversold, and Extreme Oversold (see Figure 2 above).  This is one of the key indicators to keep an eye on.

$SPXA150R

$SPXA150R  (S&P 500 %Above 150-day SMA) is a breadth indicator that measures the degree of participation and is for the medium-long term timeframe.

$SPXA200R

In [6], it states that $SPXA200R is the most important indicator right now. It measures the percentage of stocks within an index (S&P 500 in this case) that are trading above their respective 200-day moving averages. The 200-day moving average is commonly used to identify the direction of the trend. If a stock is trading above the 200-day moving average, it’s often considered to be in an uptrend and vice-versa. Therefore, this indicator is essentially measuring the percentage of stocks within the S&P 500 that are in confirmed uptrends.

Neil Blalock in the article points out that 50% is a critical threshold to watch on this indicator. The big clue here is:

More pain could be coming if this is violated, similar to what we saw last October.

For more details, you should read below companion article:

Technical Analysis—200-day Moving Average

References

1. Weakening Internals
2. Percent Above Moving Average (Stockcharts.com)
3. 2018 is the Year of the Dog: Nope, it's the #YearOfTheFrog - March 28th, 2018
4. Technical Analysis—200-day Moving Average
5. Stock Market—Primary Trend & Secondary Trend
6. The Most Important Indicator Right Now

$NYHL—Market Indicator for Internal Strength or Weakness

Updated Figure 1 on 02/25/2022 (Courtesy of stockcharts.com)

Updated Figure 2 on 02/25/2022 (Courtesy of stockcharts.com)

(Original article posted on 03/18/2018)

Very basic forms of technical analysis—like trendlines, support and resistance, and flag/pennant formations—are pretty useful. Not because they work, but because people believe they work, so they work. Also, much of algorithmic trading is based on trading these sorts of technical formations.^[4]

In this article, we will cover the topics of using new 52-week highs and lows on the NYSE to monitor the internal strength or weakness of broad stock market.

Figure 1.  $NYHL on 03/16/2018

$NYHL^[1]

Net New 52-Week Highs ($NYHL; see Figure 1) is a simple breadth indicator found by subtracting new lows from new highs. “New lows” is the number of stocks recording new 52-week lows. “New highs” is the number of stocks making new 52-week highs. This indicator provides an immediate score for internal strength or weakness in the market. There are more new highs when the indicator is positive, which favors the bulls. There are more new lows when the indicator is negative, which favors the bears.

The NYSE are usually in strong uptrend when Net New Highs is consistently above +100. Conversely, strong downtrend usually prevail when Net New Highs is consistently below -100.

Figure 2.  10-day SMA of $NYHL Cumulative

10-Day SMA of $NYHL Cumulative ^[1]

The chart above shows the NYSE in black with the High-Low Cumulative Line in red/black and a 10-day SMA of the indicator in blue (see Figure 2).  The High-Low Line rises as long as it holds above the 10-day SMA (blue line). The market shows strength when new highs consistently outpace new lows. A move below the 10-day SMA means the High-Low Line is falling and new lows are outpacing new highs, which shows underlying weakness in the index.

Figure 3.  Cumulative $NYHL

Cumulative $NYHL

One evident token of the market’s latest increased selling pressure can be seen in the above chart. This shows the daily progression of the cumulative new 52-week highs and lows on the NYSE. The cumulative new highs and lows indicator should be confirming any rise in the S&P 500 index in order to ensure a healthy broad market outlook. As can be seen here, though, the cumulative highs-lows indicator hasn’t kept pace with the recent gains in most major averages. While this indicator has at least remained stable in recent weeks, it needs to turn up again which would reflect a strengthened demand for stocks. As long as this indicator is trending sideways (see Figure 3), any gains which are made in the major averages are likely to be limited while rallies will be unsustainable.^[2]

Chris Ciovacco: "A still constructive look in NYSE New Highs - New Lows" (10/28/2024)

References

1. Net New 52-Week Highs (Stockcharts.com)
2. A Final Flush-Out For Equities
3. Weakening Internals
4. Lucky Rabbit’s Foot (The 10th Man)
5. Tom McClellan: High-Yield Bond A-D Line
• Junk bonds are the canaries in the stock market’s coal mine. 
6. IDENTIFYING BEAR MARKET BOTTOMS AND NEW BULL MARKETS

What to Expect at Stock Market Top—a Tightening Labor Market

(Updated 11/22/2021)

When Jeremy Grantham was asked the below question:

So you've called the Japanese bubble, the tech bubble, and the GFC. Is there a template to help uncover bubbles? And maybe, how were those bubbles different and how were they the same?

His answer was:

I think they're perfectly straightforward. They're intellectually easy and psychologically disastrously difficult. They're easy because in most cases they're so extreme. It's like how you notice the Himalayas when you're standing in Northern India. I mean, they come out of the plane and they soar up, you can't miss these things. 1928, '29 was just such a massive rally. So the sheer price rise you can't miss. Secondly, just to make it easier, the great bubbles have always tended to rise faster and faster towards the end, and that's a kind of defining feature also. And then thirdly, they have all been accompanied by massive, public, obvious crazy behavior where the headlines migrate from the financial page to the front page, where they migrate to the opening few sentences of the evening news on the radio or the television.

You can watch the whole talk in the Video 1 or read the transcript here. But, remind you that it's one thing to call a bubble, timing it is another thing!

(Updated 09/23/2019)

Where Are We Now in the Business Cycle? ^[6]

Based on the six-month moving averages, we can see that:

1. The Openings are below its record high since the start of the series in December of 2000 and the moving average has been above the hires levels for the last two and a half years.
2. Hires are above their pre-recession peak.
3. Quits are above their levels of last two recessions and just below its interim high.
4. The Layoffs and Discharges series is near its all-time low.

Based on two sources I'm following, both says that:

Low Unemployment Rate Signals Trouble Ahead

First, we will show a rapidly tightening job market based on the latest initial claims; then, we will show why Charles Nenner, Danial Carter, and Lyn Alden Schwartzer said that good job reports could signal trouble ahead for the stock market.

Video 1.  A Journey Through Bubble-Land with Jeremy Grantham (YouTube link)

Initial Claims

Initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 210,000 for the week ended 02/24/2018, the lowest level since December 1969, suggesting an increasing demand for labor.^[4]

Charles Nenner^[2]

The following is what Charles Nenner said:

 “When unemployment is low, it’s the end of the bull market." 

Last Sunday, he published a chart that shows every time the unemployment is around 4.1% or 4.2% (e.g., in 1973, 1987, 1990, 2007), you have a market top. 

However, "Market tops are a process," he continued.

“The cycles saw a market top. It doesn’t always have to come down immediately, it just means the market will not go higher. I don’t think we will go back to the highs one more time because the quarterly cycle, and it is a long cycle, did top at the end of last year. I also want to put in a caveat about all this talk that we are in a 10% correction. Somebody came up with 10%, and it is not based on anything... 

The fact is we are totally out of stocks. What is coming is big, but market tops take time. I don’t think it’s going to go down immediately.” 

When will this new bear market hit bottom? Nenner says, 

“We should hit a major low in 2020... I have been on record saying that the next bear market goes down to 5,000. If you are in stocks, I say you could lose everything if the DOW goes to 5,000. This is the price target I have had for a couple of years.”

Daniel Carter^[3]

Because recessions are usually accompanied by market selloffs, an Unemployment Rate bottom is a great signal for telling us when to be more cautious with our equity investments. Below is a chart of the Unemployment Rate vs the S&P 500 (SPY).

You can see that a cyclical bottom in the Unemployment Rate usually closely coincides with a market top. However, like most market timing metrics, this metric is not perfect.

Lyn Alden Schwartzer^[8]

Unemployment picks up shortly before recessions. Markets usually peak before recessions. If you want to see the trend more clearly, look at the year-over-year change of the unemployment rate:

Figure 3.  Year-over-year change of the unemployment rate (source: St. Louis Fed; retrieved: 09/23/2019)

When the blue line goes over the black axis, it's certainly a good time to review your recession plan and make sure your portfolio has the appropriate risk structure for your unique situation.

Follow-up

(08/29/2019)

In [7], Guggenheim in its "Third Quater—2019 Fixed-Income Outlook," says:

While the labor market remains strong, we believe the sharp slowdown in aggregate hours worked—a component of our U.S. Recession Dashboard—foreshadows a deterioration in labor market conditions in 2020.

Figure 4. Aggregate Weekly Hours: Production and Nonsupervisory Employees: Total Private Industries 
(retrieved : 09/23/2019)

References

1. Initial Claims
2. Charles Nenner: "We're Totally Out Of Stocks, What's Coming Is Big"
3. Unemployment Rate Signaling Trouble Ahead
4. US weekly jobless claims drop to lowest level since 1969
5. Are We Really At Full Employment? 
6. Job Openings & Labor Turnover: Clues to the Business Cycle
7. Looking Past the Liquidity-Driven Rally
8. The American Consumer Is More Fragile Than People Realize