Simple Trading Strategy – Buy Stocks in the afternoon (Oil leading the way for US indexes)

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Recent market volatility has presented an opportunity for the shrewd traders out there, taking note of a simple but clear trend – buying stocks in the afternoon. As you’ll see from the charts below, a ‘relief rally’ has often been taking place in US indexes from about 2:30pm ET, and lasting about an hour.

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January 15th and January 19th: take note of the trend reversal in the S&P 500 at 2:30pm ET. Charts courtesy of Freestockcharts.com

 

This reversing trend has been an almost polar opposite of trading through late December and early January, where the S&P 500 would maintain its ascending or descending trajectory. The most recent example of this trend reversal was on Wednesday 20th January, where an afternoon swing allowed the Dow Jones to nearly halve its earlier loss of 566 points (instead, finishing 249 points down), and the Nasdaq recovered 1.5%.

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(Top) On January 20, the S&P recovered half its losses after 2:30pm ET; (Bottom) January 21: even on a positive day, the S&P 500 took relief from oil markets closing at 2:30pm ET. Charts courtesy of Freestockcharts.com

 

So what is driving these afternoon reversals? If you ask the traders, they are saying one word – oil. Watching movements in the price of oil has acted as a leading indicator towards stock prices – across the last 20 days, the correlation between oil and stock prices has reached a four-year high of 96%. Given the bear market which oil has found itself in these last few weeks, its decrease has been mirrored on indexes around the world before reversing course at the close of the oil market at 2:30pm ET. Once oil markets have closed, trading activity has reflected a more ‘balanced’ session with less bearish sentiment presiding over the market, and traders not having to scramble to offset their portfolio trades.

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Will the trend hold up? As long as volatility in the price of oil presides, it might very well be worth keeping an eye on.