By: Spencer Israel
Market action in the regular trading session has calmed slightly following the historic levels of volatility reached in March. But in the after-hours and premarket sessions, things remain as volatile as ever.
Volatility in off-market hours is typically elevated—the result of less liquidity and lower trading volume—but the overnight markets in both individual stocks and stock index futures have been especially active and unpredictable of late.
The vast majority of large overnight moves in individual stocks can be attributed to corporate earnings. This will continue at least until the end of May, by which time nearly all companies will have reported their results for the March quarter. But in the futures market, the increased overnight volatility has less to do with cyclical factors like earnings season and more to do with structural shifts.
According to CME data through March, overnight volume in the E-mini S&P 500 futures has more than doubled since 2017. The E-mini S&P 500 futures trading session runs from 6 pm-5 pm the following day.
Part of this increase is from traders digesting global headlines—including changes to central bank policy, cringe-inducing economic data points, and other COVID-19 developments—in what has been one of the most global events in human history. The increased volume, combined with a widening of spreads, has created a perfect storm for increased overnight volatility in the E-mini S&P 500 futures.
This has only been exacerbated by the pandemic we are in. Take, for example, what happened in mid-March when the VIX was at its apex. As Jim Iuorio noted writing for the CME, the E-mini S&P 500 futures made four different moves of at least 5% outside of normal market hours between Sunday, March 15 to Wednesday, March 18. That is the same number of 5% moves that occurred during the regular session, where volatility was already at a 12-year-high and volume is exponentially greater.
Overnight moves are important to note, as they will often foreshadow how the market will digest news at the 9:30 am ET open and throughout the trading day. But this is not always the case. Sometimes the market’s overnight move will be completely undone by the regular session. On several occasions over the past few months, the market has rallied overnight only to reverse during the day and give back all its gains.
Even with fear in the market abating somewhat over the past few weeks as economies have begun to reopen, it does not appear as if the overnight markets are following suit. Volatility in the stock market may have calmed slightly in the regular session, but overnight things remain as volatile as ever.
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