When the futures market opens for trading every Sunday at 3 p.m. PST and Monday through Thursday at 4 p.m. EST, there is a slew of activity, mostly from those wanting to take advantage of a thin market. But these so-called "pajama traders," a term coined by Jim Cramer describing those who may be trading in their pajamas overnight, seem to get it wrong more than right.
Now of course there are instances where we have seen some fantastic trading action overnight. Remember the big fall and subsequent rise during the Brexit vote in June 2016 and the same type of action during the presidential election that November? While there is nothing wrong with trading the futures during off hours, the really meaningful turnover occurs during regular market hours.
Again, there are exceptions to the rule, but there are always dangers lurking in after-hours trading. In the overnight session we have the opening trades in Asia, followed by the European markets opening. We often get some sizable movements in the S&P 500 E-Mini futures market if the European markets open up big or down big.
While I would refrain from trading in this thin market during the overnight session, a trader can glean some important information from the action. We can determine if the following day might be a "risk off" day simply by looking at the trading in Europe, China and Japan, along with the volatility futures, bonds and perhaps gold and the Japanese yen. If these latter indicators are up it stands to reason U.S. equity markets will be lower, at least to start the day.
Yet, that is not always an indication of where the real-time hours trading will ultimately lead. Just the other day, the futures were down sharply but rallied to end the day near highs of the session, or some 25 S&P 500 points higher. That's a pretty strong move, nearly 1% off the bottom.
Could one have made some nice coin picking up the dip overnight? Absolutely, but those opportunities are not frequent and are inconsistent. The money flowing into overnight trading is thin and price action tends to be tricky. While many just want to trade to satisfy an urge or need, trading at a disadvantage like this is more akin to gambling.
I am aware there are some very savvy and astute pajama traders out there who demonstrate consistent success. That's awesome, keep at it! However, for the great majority of us, the best odds of winning probably lie within regular market trading hours after a good night's sleep.