It occurred to me that i should know what the returns and volatility are if one simply holds SPY overnight, every night - regardless of whether or not the market was up intra-day. Interestingly enough, it appears that the positive attributes of the aforementioned strategy whereby one holds overnight when the market was up that day are unrelated to whether or not the market was up that day. In fact, if one simply holds the SPY overnight (every night), then the average daily return is .036%, whereas if one only holds overnight after the market was up intra-day, then the average daily return is only .030%. Furthermore, simply holding overnight, every night, provides for an overall return since 1993 in line with a buy-and-hold strategy with much less volatility.
If I were to fabricate a theory to explain this phenomenon, I'd say it has to do with a liquidity premium related to the idea that many market players (e.g. day traders) are only active during the day and liquidate their positions prior to the market close so as not to have exposure over night. So the strategy of only holding stocks overnight means that one is selling at the open (when others are bidding up the prices) and buying at the close (when others are selling down the prices).
If one wanted an apples-to-apples comparison of the hold-overnight strategy against the buy-and-hold strategy, then one could leverage their investment overnight (via margin borrowing). This means one would be holding more stock in comparison to the amount of their investment and therefore the changing price of that stock in proportion to their investment would be more volatile. Given the data set I'm working with here (i.e. ticker SPY since 1993), if one were to have consistently financed 47.9% of their overnight holdings via margin, then the annualized volatility (standard deviation of returns) would have been 19.8%, precisely the same as for the buy-and-hold strategy. However, the returns from this leveraged hold-overnight strategy would have been 12.88% (annualized), which compares favorably to the 7.33% annualized return provided by the buy-and-hold strategy. For this analysis, I've just assumed the interest rate associated with the margin borrowing was a constant 10%.
Aside from higher returns with equivalent volatility (if leveraged) or equivalent returns with lower volatility (if unleveraged), there is the conceptual risk reduction associated with the fact that one would only be exposed to stock price fluctuations for ~16 hours per day, rather than 24 hours per day. So if something bad happens in the world that triggers a market crash, one would theoretically have a 1 in 3 shot at side stepping the carnage to their portfolio.
So what's the catch? Transaction costs. If one bought everyday at the market close and sold the next morning at the market open, one would lose their entire investment over time to brokerage commissions. This is the case even if one started with $100, 000 and could complete trades for only $10 per 1,000 shares traded.
Nonetheless, this overnight holding phenomenon could be marginally useful information even if one has to incur transaction costs, because if one is using some other system that generates daily trade decisions, one could enter those buy orders at the market close and enter those sell orders at the market open and perhaps realize some additional return over time.
