Friday, April 9, 2010

Does the Overnight-Session Predict the Day-Session?

Building on the recent overnight- versus day-session performance comparison post, this note considers whether the direction of the overnight-session of the SPY can predict that of its daily performance.  In the chart below, the red line represents a rolling 100-day percentage correct of directional follow-through for the night- to day-session:


In the ten-year study, follow-through was a near random 48%, although the balance of the distribution was clearly negative.  However, there where definitely periods when the indicator trended heavily to lows of 34%, and highs of 62%.  As it turns out, these extreme periods where fairly well correlated to trailing market volatility, as represented by the light green line.

This suggests, not surprisingly, that high follow through has been largely a function of increased negative directional volatility.  In contrast, low follow-through has corresponded to very muted periods of volatility supporting behavior more akin to a random walk.  In answer to this post's title -- yes and no -- while the typical edge is slight at best, certainly both extremes may provide an informative edge with volatility acting as a leading signpost.

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