By Nicholas Colas of Convergex
Morning Has Broken
Intraday U.S. equity market volatility has been high throughout this week’s turmoil, and today we look into one specific reason: retail investors’ penchant for trading the open. Markets operate from 9:30am to 4:00pm every day, so why do personal investors insist on crowding into the opening print? To unravel this mystery, we turn to our old friend Google Trends – the online tool that allows you to see how many times users search for a given term. Looking at just the last seven days with a 15-minute window, the answer becomes clear. Non-investment professionals – real people, essentially – have a very specific routine when it comes to everything including investing. Market volatility pings their radar at 6:30am, when searches for “news” hit their weekday peak. That turns into a fast ramp of searches for “Stock quotes” and “ETF” which top out at – you guessed it – 9:30am. By the time the close comes around, the number of those searches has dropped 50% or more. Individual investors would do well to extend their attention to midday, even though that’s the time at which searches for the word “Shop” peak.
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A piece of my retirement savings is housed in a self-directed IRA at a major online brokerage, where I own a mix of equity and bond exchange traded funds as well as single stocks. It is not, by any means, a spicy mix. All the ETFs trade like water most days and most are of a distinctly risk-averse composition. As my first boss once told me: “Invest conservatively – you don’t want to have to make the same money twice.”
So imagine my surprise Monday morning when during the sell-off two of these supposed bastions of low/hedged volatility in ETF form were off +20% at 9:40am. I was out of the office, and I kept hitting refresh to see if these were just bad prices on a spiky open. They weren’t. It took the better part of an hour for two funds – both of which have well over $100 million in assets – to come back up to something approaching their correct net asset value. Watching this all unfold was more like seeing a huge thunderstorm pass slowly overhead than just a “Flash Crash”.
That got me thinking about something institutional investors often neglect until it hits them full force on a choppy day: how retail investors trade in volatile markets. We all know the market aphorism – which anyone familiar with individual stock traders will tell you is true: “Retail opens the market, and institutions close it”. But now that volatility is clearly back in U.S. stocks the difference between those two events – even on the same day - can be exceptionally stark. Will this most recent bout of market churn finally teach retail to avoid the open and thereby reduce intraday volatility?
Probably not, and I can make that case by using Google Trends and a bit of information about the typical daily patterns of everyday Americans. If you’ve never used it, the Google product allows you to see how many times its users search for a given term. You can look back a decade or a day, focus on the U.S. or any other country’s Internet population, or a combination of the two. What you get is a line chart of search frequency and map of where that particular search is most popular.
So, let’s start with the typical American’s day – according to numerous online studies done over the years, we wake up between 6-8am. The single most popular alarm setting is 6:00am, followed by 7:00am. We arrive at work between 7:30 and 9:00 am in our local times, most typically at 8:00am or a little after.
It is during these morning hours that Americans are most likely to Google the terms “Weather” and “News”, for example. This could well be a vestige of the old newspaper delivery cycle, but peak interest in “News” searches is 6:30 – 7:30am am every morning, based on the Google Trend data for the last 7 days. By noon Eastern Time, the number of searches for that term has dropped by more than half. The same pattern occurs for financial news searches like “CNBC”, “WSJ”, “Financial Times” and “Zerohedge”.
Given that the individual investors get their news in the morning more than any other time of day, the whole “Trade the open” phenomenon begins to make sense. Still, let’s follow it through using the Google Trend data, with a specific focus on the last 7 days:
- Searches for “Stock quote” peak between 9:30 – 10:30am Eastern Time and double between roughly 7:30am and the open. After that it trends lower through the day, with a small uptick at the close that is about 50% of the interest as compared to the open. Market volatility understandably spurs incremental attention: the number of Google searches for “Stock quote” on the open Monday was more than double that of the previous Thursday/Friday for the same time of day.
- Searches for “ETF” mirror the intraday pattern for “Stock quote” almost exactly – a spike at the open and then waning interest until a small uptick at the close.
- Searches for online brokers – we use TD Ameritrade, Fidelity and E-Trade as proxies here – also follow the pattern, albeit with a lot more volatility. Searches Monday morning for these three queries were approximately 3-4x higher than the prior Thursday/Friday. Today’s search volumes for these terms were still 50% higher than last week as well.
- Searches for popular retail investor symbols like “AAPL”, “GOOG”, “NFLX” and “AMZN” all peak at 9:30am Eastern Time as well. In case you are wondering, the order I just outlined mirrors their relative popularity as a Google search, with the ratio of searches from this morning’s open at: AAPL (49), GOOG (10), NFLX (9) and AMZN (4). Searches around the close are roughly 50% of those at or near the open, at least over the past week.
Clearly, Americans associate the morning with “Time to trade equities”. They hear news – in the case of the last few days, bad news from overseas – first thing in the morning. By the time the market opens, they have made their decisions and entered their orders. About half as many will check in around the close to see how things turned out, but for many the next piece of market news won’t hit their mental “Screen” until 20 hours or so later.
So what types of searches dominate the rest of the day? Basically, anything but trading stocks. Popular news sites like Buzzfeed see their Google search traffic spike around noon, presumably as workers take their lunch break and look for some diversion with their meals. Searches for “Shop” have a long plateau from 12:30pm to 3:30pm, presumably because of a similar lunch time break that allows some online errand-running. Come the evening and sites like Yelp and Grubhub hit their strides from 6:30 to 8:30pm and again at 10:30pm East Coast Time, or West Coast dinner time.
The basic takeaway from this analysis is simple: individual investors are unlikely to migrate away from trading the open. The attention patterns that Google Trend data highlights shows a clear bias to take in incremental news first thing in the morning, look at stock prices immediately after, and take action at 9:30am. That means we’ll likely have some more choppy opening prints in the coming weeks of market wide volatility. For the institutional trader, this presents a clear opportunity. And for the retail trader, either become a contrarian (always a good idea, but especially so now) or try to break free of the urge to get that 9:30am price.
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