The Overnight Effect (Gap ups)

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Remember 2018? Even my cousin had the Robin Hood app. 

Stocks were making more money while you slept than during trading hours. It seemed too good to be true, and it was.

Some genius launched the Nightshares S&P 500 ETF in June 2022 to capture these overnight gains. Fourteen months later: liquidated/gone/poof.

A cool research paper by Perreten and Wallmeier explains why the effect died and reveals something more valuable about how markets actually work.

It Was Always About Hype

The overnight effect wasn't a market inefficiency. It was attention-driven behavior that created a predictable pattern.

Most stocks follow an "L-shaped" volume pattern: quiet all day, then heavy trading in the final hour when big money wants to trade. But certain stocks broke this pattern. Think AMD, Tesla, or any stock mentioned on CNBC three times a week. These attention magnets created "U-shaped" volume - heavy trading at both market open AND close.

AMD shows that telltale U-pattern because everyone has an opinion about chips. Ametek, a boring $40 billion industrial company you've never heard of, follows the normal L-pattern because nobody's setting alarms to trade industrial measurement equipment.

The mechanism was simple: overnight news would hit, retail traders and momentum-chasing institutions would flood in at market open, artificially pushing prices higher. But here's the kicker - these same stocks delivered identical total returns. The overnight "edge" came entirely at the expense of daytime performance.

Giveaway this was behavioral, not fundamental: it only happened in U.S. equity markets. Europe? Nothing. UK? Nada. We're uniquely good at creating hype stocks with CNBC, Reddit, Discord groups, and FinTwit turning every earnings beat into must-watch television…a

COVID Killed It

Two things happened post-pandemic: retail traders went back to their corporate lives, and macro events started mattering more than individual stock stories.

Look at the charts: the overnight effect largely disappeared after 2021. The dramatic outperformance flattened to almost nothing.

The game changed. Markets have gotten more efficient, big money caught on, and frankly, there's less "overnight" than there used to be. You can trade Tesla at 3 AM now thanks to apps like Robinhood's 24-hour trading.

The Real Lesson: Markets Are Getting Harder

The overnight effect's death proves markets price in behavioral quirks faster than ever. What used to persist for years now dies in months.

Nightshares launched their ETF in June 2022 to capture overnight gains that had been dead since 2021. That's not bad timing—that's chasing ghosts. By the time Wall Street packages a supposed edge into an ETF, the party's already over.

Real edges come from three places: superior information (good luck), superior analysis (requires work), or superior patience (your best bet). Everything else gets arbitraged away once enough money chases it.

Disclosure: Always conduct your own research and consult with a financial advisor before making investment decisions. This analysis reflects Pivot and Flow’s views and isn’t personalized advice. All investments carry risk, including complete loss of principal.

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