When you get the news when you sit down for breakfast on any given weekday, you will likely find a commentator saying something like, “Markets are poised to open higher” or perhaps, “We expect to see markets move lower at the open.” Hearing these predictions may make you wonder how these pundits can predict the future and why investors care about the direction of the market open. After all, the closing price should tell you how much money you have gained or lost in your portfolio for the day. However, there’s more to the story than you might expect. Below, we guide you through how these market forecasts are derived and how they can inform your own trading strategy.
Key Takeaways
- Trading stocks takes an abrupt halt each trading afternoon when the markets close for the day, leaving hours of uncertainty between then and the next day's open.
- Predicting where the market will resume trading at the open can help investors both hedge risk and place bets on the next day's price action.
- After-hours trading in stocks and futures markets can provide a glimpse, but these tend to be less liquid and prone to more volatility than during regular trading hours.
- For a better picture, investors look to international markets that are open while the U.S. is closed, to economic data released by countries, or to figures released by companies.
Predicting the Likely Direction of theMarket Open
Before we get to why some investors closely track the open’s likely direction, let’s look at a few indicators that help them with the task.
While the financial markets have clearly stated business hours, developments outside those hours influence both thevalue of securities and investor behavior. For example, geopolitical events and natural disasters can occur at any time. Something extreme, like the assassination of a sitting president or a major terrorist attack, is likely to indicate a significantly lower market open.
Corporate data releases also have a role. Earnings announcements made after the close or before the open in key companies can influence the market’s direction. In January, April, July, and October, most firms release their results for the quarter. Good news from a bellwether firm often leads to a higher stock market open, while bad news can have the reverse effect.
Other important news comes out before the markets open. Various economic releases, including employment data, retail sales, and gross domestic product results, are released at 8:30 a.m. Once again, both good news and bad news can sway the market open’s direction.
Examples of events affecting the market open
Two examples from this decade show how events can affect the market open. For instance, during the COVID-19 pandemic, there were many when changes overnight affected the market open. For example, throughout March 2020, the pandemic's spread caused a fall in the market. On March 11, the day the World Health Organization officially declared COVID-19's spread a pandemic, the S&P 500 closed at 2,741.38. It opened the next day at 2,630.85, a fall of more than 100 points.
The Russia-Ukraine war also affected the markets. When Russia invaded Ukraine on Feb. 24, 2022, it shook the markets, causing the S&P 500 to open at 4,155.77, a drop from the previous day's close at 4,225.50.
After-Hours Trading
After-hours trading commonly helps indicate the next day’s open. Extended-hours trading in stocks takes place on electronic markets known as ECNs before thefinancial markets open for the day, as well as after they close.
This activity can help investors predict the open market direction. In fact, gauges such as the Nasdaq-100 Pre-Market Indicatorare designed to track extended hours of activity for this purpose.
Likewise, since they trade virtually 24 hours a day, index futures can foreshadow how the market will likely trend at the start of the next session. S&P 500 futures are used bymoney managersto either hedge risk over a certain period by selling the contract short or increase their stockmarket exposureby buying it.
Unlike the stock market, futures markets are closed less often. Index futures trade based on the values of the stock market benchmark indexes they represent: S&P 500 futures trade based on the value of the Standard & Poor’s 500, just as Dow futures trade based on the value of the Dow Jones Industrial Average.
Since the securities in benchmark indexes represent a specific market segment, knowing the direction of pricing on futures contracts for those indexes can help project the direction of prices on the actual securities and the market. If S&P futures are trending downward all morning, stock prices on U.S. exchanges will likely move lower when trading opens for the day. The opposite is also true, with rising futures prices suggesting a higher open.
In addition to offering market access almost 24 hours a day, a major benefit of futures is their high liquidity after hours compared with the stocks traded on ECNs. This liquidity affords tighter spreads, which are critical because the wider the spread, the more a trade has to move in your favor for you to break even.
Unlike trading stocks on ECNs, E-mini S&P 500 futures trades are executed through theChicago Mercantile Exchangeand itsmember firms.
How International Markets Influence the Open
When domestic markets are closed for the day, international markets are open and trading. A good day in Asian markets can suggest that U.S. markets will open higher. Devastating losses overseas can lead to a lower open at home.
By paying attention to foreign developments, domestic investors can get an idea about what direction they can expect local markets to move when they open for the day. Major stock exchanges in Tokyo, Frankfurt, and London are used as barometers for what will happen in the U.S.
Serious market watchers wake up early, pull the data, and use these indicators on their own and together to tease out the direction of the opening moves in the U.S. market. Less ambitious investors just check in on social media sentiment or tune in to the morning financial news broadcaststo hear the talking heads provide an update on expectations for the day. Either way, gettinga reasonably solid reading on what to expect when U.S. trading starts for the day is possible.
Example of when the international market affected the market open
Because international markets are open when American markets aren't, changes in those markets can influence how the American market opens.
A typical example would be from Feb. 14, 2024, the FTSE 100 index moved much higher shortly after opening and remained above its previous close. When the U.S. market opened later that morning, it opened higher than its last close, with the S&P 500 opening at 4,976.44 compared with its previous close of 4,953.17.
Why the Direction of the Open Is Important
The market direction can present some investment opportunities. At abroad level, if markets are set to rise, individual stock prices are likely to do so as well. Short-term traders can make buy/sell decisions based on the information. For instance, if markets are set to rise and then a technology company releases good news before the opening bell, that company’s stock is likely to increase at the open.
For investors who hold the stock, this could be a signal to sell existing holdings and lock in profits. For investors who don’t own the stock, it could be a signal to buy early and sell into a rising market. Keep in mind that if you only have a few dollars to invest, the exercise in tracking market direction may be meaningless.
However, buying 100,000 shares that climb twocents each could make a quick $2,000 (ignoring transaction costs)—not bad for an hour’s work. If you can buy 500,000 shares that rise 10 cents, you could make a quick $50,000, and the numbers go up from there. For big institutional traders, there’s serious money to be made on these moves. In an era of rapid-fire electronic trading, even price movement measures in a fraction of a cent can result in big gains for deep-pocketed traders who make the right call.
Does The Market Tend to Keep Moving in the Direction of Its Open?
Some investors use the market open to get a sense of how the market will perform that day. Day traders often track premarket trading and early price changes. Many believe that stocks are likely to reverse course shortly after market open, presenting a buying or selling opportunity.
Is It Better to Buy at the Market Open or Close?
There isn't a single time of day that presents the best buying or selling opportunity. It depends on your goals. Day traders, for example, may prefer to trade soon after the market open to capitalize on the higher volume and volatility, while other investors prefer to invest later in the day.
What Time Does the Market Open?
In the U.S., the New York Stock Exchange and Nasdaq open at 9:30 a.m. Eastern Standard Time (EST) on trading days. Trading ends at 4 p.m. The exchanges are closed for some holidays or may end trading early on other days. International markets have their own trading hours.
Why Don't Stocks Open at The Previous Day's Closing Price?
Even though the market is closed overnight, new information and world events are constantly influencing the value of stocks. Even when the market is closed, new orders can be entered, ready to execute when the market opens. Some traders participate in premarket and after-hours trading. These facts mean that the fair price for a stock can be discovered before the market opens, so shares will immediately start trading at their new values.
The Bottom Line
Accurately predicting the stock market’s opening moves can be a helpful tool. If you’re accurate, you have an opportunity to profit. Of course, the first step is to gauge the market direction correctly. That step alone isn’t enough to make money.
You also need to select an investment and successfully gauge the impact the market’s move will have on your investment to profit. You may not correctly guess the market’s direction, and the market may move against you. Even if you get the direction right, your investment must also be correct to generate a profit. Simply put, there are no guarantees that you will get the direction right or that your investment will pay off.
As with all investment strategies, you should conduct a thorough analysis while understanding your strategy and its implications before you bet on the direction of the open.
