Market Direction and Stock Trends

[DiscoverGold]

S&P 500’s prospects are as clear as night and day
By Mark Hulbert

* July 8, 2016

Why foreign investors in U.S. stocks are, as a group, a more reliable contrarian indicator than U.S.-based investors



CHAPEL HILL, N.C. — It’s an open-and-shut case: The stock market’s near-term prospects are good.

I’m referring to the stock market’s recent pronounced tendency to perform better when the NYSE is open than when it’s closed. Just take a look at the accompanying chart, based on data compiled by Tom McClellan of The McClellan Market Report. It compares the average daily performance of the S&P 500 ETF SPY, +0.79% also known as Spiders during the regular trading session in the U.S. and during the overnight hours.

Over the last four months, as you can see, it on average lost ground during those overnight hours, when trading is dominated by foreign traders. During the day session, in contrast, the S&P 500 SPX, +0.80% produced an average gain that is even larger than the overnight losses.


This pattern was very much in evidence earlier this week: During the overnight hours from Tuesday’s NYSE close to Wednesday’s opening, the Spiders lost 0.28%. From then until Wednesday’s close, however, the Spiders gained 0.88%. Though the headline number that most investors focused on was the close-to-close gain of 0.60%, this masked the significant divergence between the day and night performances.

McClellan’s analysis convinces him that the stock market does better when its performance during the day is better than overnight.

His analysis has an interesting implication for contrarians: It means that foreign investors in U.S. equities are, as a group, a more reliable contrarian indicator than U.S.-based investors. And that certainly makes sense: The more removed an investor is from what’s going on, the more likely he is to react emotionally and get swept by the crowd—and therefore be wrong.

If you live in the U.S., however, don’t get too smug about this result. You and your fellow U.S.-based investors are the contrarian whipping boys when it comes to investing in non-U.S. stocks. Bear that in mind whenever you believe you have special insight into what’s going on in a foreign market.

Take British banks, for example, whose prospects are especially uncertain right now given the recent British referendum to leave the European Union. If you’re living outside of Europe, what makes you think you know more about those banks’ future than do insiders in London?

Based on the nearly 200 U.S.-based advisers whose services I monitor, I can say that most of those who recently sold or shorted those banks’ stocks did so because of one or two broad-brush generalizations that had already been hashed and rehashed endlessly by the rest of the market. Their herd mentality is just what contrarians like to do the opposite of.

To monitor the day-and-night pattern going forward in the U.S., just keep track of each trading session’s closing price and the subsequent session’s open. If the stock market starts consistently performing better in those overnight hours than during the day session, you might want to take some chips off the table.

For the moment, however, the U.S. stock market appears to be the beneficiary of this pattern.

http://www.marketwatch.com/story/sp-500s-prospects-are-as-clear-as-night-and-day-2016-07-08?siteid=rss&utm_source=tf

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