A Momentum Strategy In SPY During The Last Hour

Here is the hypothesis: if SPY rallies from the open and until the last hour, can we make money by going long one hour before the close and exit on the close?

Previously I have written about the different periods of the trading day:

This is a strategy I have traded live over the last year (just a few trades). I have tested with different thresholds, but it seems like the more SPY is up from the open (it works better from the open than from yesterdays close), the more likely to rally the last hour. I have use a threshold of 1.25% from open to the last hour, and I get 18 fills since 2010 until present and 13 winners. This is an average of .39% per fill, not bad for such a short holding period. Considering a total holding period of 18 hours over more than 2.5 years, a total gain of 7% must be considered extraordinary. Here is the equity curve:















There is few fills, though. Increasing the threshold to 1.5% we get 8 fills and 6 winners, and the average increases to 0.49%.

If I measure from yesteday’s close to the last hour, I don’t get such remarkable results. I’m not sure why. Does anyone have any suggestions? It’s still good, but average drops. Here is the results from yesterday’s close to last hour:

Threshold P/L #fills #wins Avg
1.25 7.41 66 40 0.11
1.5 4.89 42 23 0.12
1.75 5.53 29 19 0.19
2 4.07 21 14 0.19
2.5 3.89 12 10 0.32
3 1 4 2 0.25

To reverse it, ie. to go short if a large drop from the open, does also work (see below for explanation). For small movements there seems to be a tendency downwards, but large drops gets reversed. However, measuring from close until the last hour my results are a bit disappointing. Using from the open I get tradeable results using a threshold of about 1.5%, but 1.75% seems better (the more movement the better). Here is the equity curve for 1.75% (15 fills, 8 winners):

Why does this work? I have no idea except for the following:

  • Short covering, or
  • rebalancing in ETFs

There are a lot of traders who fades SPY. If SPY just continues higher, a lot of them might want to take a stop-loss by covering and thus needs to buy (and they may take profits on big down days and buy during the last hour). The other reason is the growth in leveraged ETF’s. A lot of the leveraged ETF’s needs to rebalance every day and this pushes more fuel to the fire. You can find a description about this here. When the market goes up  leveraged bull ETFs need to buy more to keep the leverage ratio. When the market drops, it’s the opposite effect, because bear ETF’s need to buy. However, this is not my field so I strongly urge to read this research paper and this blog (thanks to Rob Hanna and ATrader for making me aware of these articles). According to the mentioned research paper as much as 10-50% on the MOC orders could be attributed to these ETF’s! Reading the research paper gave me new insights on how the markets work.