About That Friday Closing Ramp: Something Snapped In 2016

It's Friday, which means Wall Street is patiently waiting for what has become a novelty tradition in close of week trading: a late day ramp, starting around 3:30pm and picking up speed into the close.

There have been various explanation for the ramp, most recently from JPM, which proposed that at least in recent months it has been the result of retail buying of ETFs, which in turn rebalance at the end of the day, creating a self-fulfilling buying prophecy and a last 30 minute buying spree to balance out positions. Others have suggested that foreign buyers take advantage of the increase in liquidity at the end of day: per JPM, so far in 2017, 37% of the NYSE trading volume took place during the last 30 mins of trading.

Whatever the reason, the markets peculiar end-of-day acrobatics have now been noticed by everyone, including the WSJ which wrote that "in the final half hour of trading, the blue-chip index mounted a comeback and popped into the green during a final nail-biting few minutes of trading. The index closed up 11.44 points, extending a streak of record highs one more day. Though Friday’s session was particularly dramatic, there’s an increasingly common pattern whereby the market opens lower only to drift upward through the day. In fact, if it weren’t for the final hour of trading, the S&P 500 would have finished lower on many of the days this year."

The WSJ has no more insight into this recurring phenomenon than even Wall Street's most seasoned professionals:

On the one hand, the emergence of buyers late in the trading day is a sign of confidence in the market’s continued uptrend. On the other, it shows the market may be increasingly disconnecting from corporate and economic fundamentals as momentum carries forward.

Our assessment is in the latter camp, especially since as the WSJ points out, "for years, it’s been a market mantra to “buy the dip” when stocks fall. But that’s become even more ingrained in the last year as small drops reliably lead to bigger rebounds, often within the same session."

Which then reveals another, even more curious observation. Pulling trading data over the past year, FBN Securities' JC O'Hara has found that most of the gains for the S&P 500 have come during market hours, rather than gapping higher at the open as a result of positive news between trading sessions. As the WSJ notes, "it’s a divergence from historical extremes. It may also mean the tone set by other global markets doesn’t last through the U.S. session. In other words, the market gains are more a drift upward than high-conviction buying."

O'Hara confirms this stunning divergence with the following dramatic chart, which shows that gains in an S&P-tracking exchange-traded fund are accruing much quicker during the session than between sessions, particularly over the last year.

The chart shows that traders who buy at the open and sold at the close each day since the beginning of 2009, would be up 85%. Buying at the close and holding overnight to sell at the open would have netted you just about half of that. However, the pattern was generally as expected until the start of 2016, when something visibly "snapped:"

As the WSJ's Ben Eisen points out, "What’s interesting is that most of that divergence came about in the last year. But they began moving apart in early 2016: Since the market hit a recent low on Feb. 11, 2016, stocks have risen 26% during the daytime, and just 3.2% during the night-time."

As a reminder, the Feb 2016 lows took place just prior to the Shanghai Accord in which the world's top financial leaders sat down to hammer out a plan on how to prevent the market from falling further. Ever since then, the S&P500 has been on a relentless tear higher - especially during the daytime session - as one can see in the chart above. According to the WSJ, "that’s reflective of the increasing drift as markets take the escalator higher. Market momentum appears unstoppable for now, as investors bet on business-friendly policies coming out of the Trump administration this year. The question now is whether it lasts." 

The answer: as long as the world's top financial leaders demand it, or rather as long as is necessary to complete the rotation of risk assets from institutions and hedge fund managers to retail bagholders, as has been the case so far this year per JPMorgan.

However, for today's practical purposes, a far important question is whether the Friday afternoon surge, which emerged two Fridays in a row will once again "mysteriously" appear again, and take the market suddenly into the green in the last 30 minutes of trading.