One of the ongoing debates that we've all heard over the years is whether or not one assumes too much risk by holding positions overnight. Is it better to go home flat at the end of the day, therefore avoiding all the crazy possible events which can occur when the market is closed? No Al-Qaeda, no terrorist attacks, few--if any--economic reports to be concerned about...simply exit the positions and start fresh every day.

For pure day traders, it's a no-brainer. Day traders are out no matter what. But, what about everyone else? What about those of us who are in a position and asking whether or not it's worth the risk to hold it overnight?

This week, I'm going to share with you over 12 years worth of results which may open your eyes.

The Test

We went back to 1993 and looked at the SPYs since they first started trading. From 1993 - May 20 2005, the SPYs have risen from just above $43 per share to just above $119 for a total of approximately 76 points, (which is a very nice bull move). We ran two separate tests: The first test had us buying the SPYs on the open each day and selling them on the close (therefore taking no overnight risk). The second test had us buying on the close each day and exiting on the open (therefore assuming full overnight risk). How do you think the results proved out?

Well, if you listen to the individuals who hate overnight risk, you'd likely say that the market gains came during the day and the overnight risk ate into the gains. But, in reality, the results are just the opposite (and somewhat shocking).

The Results

If one had bought the SPYs on the close over the past 12 years and sold them on the next day's open, they would have made 143 SPY points (plus, they would have also received all the quarterly dividends). And had one bought the SPYs on the open each day and sold the position on the close, how would they have done? They would have lost money! How much? A little more than 67 points. Yes, in spite of a solid upward move in SPY prices, the intraday move--on a net basis--was negative! All the gains, and a great deal more, came from holding the SPYs overnight. And then a good chunk of these gains were lost while the market was open.

What Does This Mean?

First, just a reminder that the above test results are simulated and it cannot be assumed that the results will be the same in the future. Also, one cannot trade this outright because of the transaction costs.

With that said, the results show that at least from 1993, the S&P 500 index market participants have been more than amply rewarded for holding positions overnight. Does this mean that day trading doesn't work? No, of course not. There are many successful daytraders and they are succeeding for a multitude of reasons, including shorting the market at appropriate times. But, the long side of the S&P 500 has provided no positive edge to day traders on an open-to-close basis since 1993. The long edge (and this edge has been substantial) has gone to those holding positions overnight. And these overnight holdings have included 9/11, the Long Term Capital/world financial crisis in 1998, the war with Iraq, multiple major political events, corporate scandals, economic reports, and a whole slew of other things which cause fear in most everyone. And, it appears that these fears have created a continuous mis-pricing of the market and this mis-pricing has allowed for overnight holders to be well rewarded.

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Summary

Should you hold a position overnight (especially a SPY position) simply for the sake of a past edge? No, I don't believe so. These test results do show, however, that contrary to popular belief, from 1993 - May 2005, the gains have occurred while the market has been closed, not while it has been open. If this holds true in the future, it may help you sleep a lot better while you're carrying your positions overnight.

Have a great week trading (and enjoy the 3-day holiday weekend)!

Larry Connors