Why Traders Are Most Bullish When Markets Are Closed

StockTwits did a little data mining the other day to answer the question of when investors were most bullish, both in time of day and day of week. Intuitively, I would have guessed it's mostly random. There's no particular day-of-week or time-of-day biases in the actual market. If we had biases, they'd get gamed away in nanoseconds. The algo-bots would buy stocks at 10:57 every day, or whatever, until the blips smoothed out.

As far as sentiment goes though, I would have guessed wrong:

"...while investors and traders were overall quite bullish, investors were most bullish on weekends (when the market is closed) and trading day mornings (when the market was about to open). Additionally, they were most bearish in the middle of the trading week, towards the end of the day and after the close."

Wait, what? So, let me get this straight: Investors and traders like stocks when they can't actually see them trading. But once the ticker gets churning, they don't like them as much.

StockTwits offered a few hypotheses:

• "When money is at risk, people are more nervous and money is more likely (or perceived to be more likely) at risk while the markets are open.
• "On nights and weekends people are doing research and mostly sharing their picks, and since most people go long, picks that they share tend to be bullish.
• "The risk of negative news event is much more likely while markets are open then they are when they are closed."

I have a different theory. StockTwits is comprised mostly (but not entirely) of active traders. So it's not a totally representative sample of the marketplace. It does, however, provide a good proxy for a subsector of the marketplace -- namely, the "active trader" part. And as active traders, we tend to have very short time horizons. We all tell ourselves to remain patient, but that's WAY easier said than done. What's more, we have an even shorter time horizon when we put our opinions out in public view. Now our name and our trade are attached to our pick.

When the markets are closed -- or inactively trading, and not moving much in off-hours -- it's relatively easy to stick with a call. But then the bell rings, and inevitably the stock doesn't instantly act as we think it will, and we begin to lose faith ... and, ergo, we don't feel so bullish about it anymore.

So to me, the dynamic StockTwits highlights here sounds somewhat counterintuitive on the surface. But if you think about it, it kind of does make sense. We all have such short attention spans, and it's likely that we collectively bail too soon on even our best ideas.

I'm not an active trader anymore, but when I was, I sometimes put some trade thoughts out on StockTwits (and before that, an options blog I penned). And I felt way worse and/or foolish if I went "public" with a trade that didn't work out than I did on perhaps a way worse trade or position that I never mentioned. So yeah, I could see the whole experience here. Have an idea, tweet it out, have it not work quickly, and then turn negative.

I guess the bigger question is whether there's a dynamic here we can fade and capitalize on? I would say probably not. And that's because as many machines as we invent, it's still human nature that guides prices. If we get too bullish, they fall in our face. If we start thinking we'll never see our stocks lift again and we give up, all of a sudden there are buyers. To me, this StockTwits finding is very interesting, but it's part of why stocks move the way they do to begin with.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.