Sunday, July 30, 2006

Whatever Happened to the Last Hour of Trading?

What does it mean when traders are buying or selling stocks in the last hour of the day? Some have suggested that this might be a "smart money" indicator, in that institutions that want to position themselves for anticipated moves will do so prior to the close to take advantage of overseas strength or weakness. Another way to view trading in the last hour is as a sentiment gauge. Heavy buying (selling) in the last hour means that bulls (bears) are so convinced of their positions that they're not willing to wait until the next day's open to place their orders.

Yet another view is that buying/selling in the last hour reflects risk-taking (willingness to assume overnight risk), while avoidance of buying/selling reflects risk aversion.

Whatever the explanation, we can see that a cumulative index of price changes in the Dow over the last hour of trading has failed to keep up with the Dow's price advance since the end of 2004. Early in the bull market, traders were buying during the last hour. Since 2005, this has not been the case. Even on Friday and over the past two weeks, when we had a nice pop in the Dow, there was no push to buy in the last hour.

Is smart money avoiding the market? Is sentiment bearish? Are traders behaving in a risk-averse fashion? Perhaps all the above. What we can see for certain is that willingness to step up and buy in the last hour has essentially vanished from this market.


Zentrader said...

I have noticed over the past month, a large sell off on Friday,s in the last hour of trading on the Nasdaq.The exception was Fri/28/06

Brett Steenbarger, Ph.D. said...

Excellent observation, Zentrader; thanks for the note. A selloff late on Fridays would suggest an unwillingness to assume risk by holding over the weekends. Conversely, buying late on Fridays might suggest the opposite. Interesting area for further investigation.


YanivBA said...

Thanks, this was a very interesting post. It should be also interesting to see if the same pattern holds regardless of the selection of the time to the close. Does the return of the minute to the close, adjusted for the different standard deviation, look the same as the 10 minute to the close and the same as the 30 minutes to the close?

I think the last hour has a strong economical justification to be more efficient then the preceding hours because of the decrease in liquidity associated with the close. If we measure the R square of every hour in the day to the return of the next day does the last hour have more predictive power than the rest?

The chart you presented should in theory prove as a good long term indicator. How long back can you trace this indicator? Can you show a few more charts for the preceding years? Can you post the raw data?

And last and most important, is there anywhere this indicator can be tracked on a weekly basis?


Brett Steenbarger, Ph.D. said...

Hello YanivBA,

You make excellent points, and I do think this last hour issue is worthy of further research and refinement--particularly your idea of tracking late buying/selling and its relationship to trading early the next day.

I may in the future post more on this topic. A good source for intraday data that would help you investigate this issue is Tick Data ( I don't know of any source that updates a cumulative index of last hour trading on a weekly basis, although that wouldn't be so hard to do once you had the data.

Thanks for your post--


Sheanon said...

i'm not 100% sure, but I heard that company buybacks are allowed up until 3:30pm EST. So with this thinking stock prices are propped up by institutions buying back stock. When this support drops out, maybe traders who have identified this trend are coming in to sell the stock at this point.