How Do Investors Know the Stock Market Will Be Up Before it Opens?
It's not really accurate to say that investors "know" the market will be up when it opens. The stock market can always surprise and move opposite of expectations. However, the overnight news and the futures markets give some indications of the market direction as the morning hours move toward the 9:30 opening bell.
Stock Market Hours
The U.S. stock exchanges are open from 9:30 a.m. until 4 p.m. Monday through Friday. During those business hours, stock prices and the resulting market direction can react immediately to news events or changes in the group psychology of the market participants. During the 16 1/2 hours the markets are closed each day, events happen that could affect stock prices. The overnight and early morning "tea leaves" give investors an idea in which direction the market will move when it opens again.
Exchanges Around the World
Stock exchanges are open somewhere in the world even when they're closed here. Overnight, the markets in Japan, Hong Kong, China and Australia are having their trading days. The European stock markets open up five to six hours before the exchanges in New York City. If the the global markets are moving in the same direction throughout the night, there is a good possibility that the U.S. stock markets will follow the global trend, at least to start the day.
Company Financial News
All U.S. companies are required to release quarterly financial reports that discuss business results such as sales and earnings. Quarterly reports are released either before or after stock market hours, never while the market is open. Surprise results from a major company can help push the market in one direction or the other when the exchanges open. For example, Alcoa is always the first major company to report earnings when earnings season rolls around. A good or bad report from Alcoa is often viewed as an indicator of how other stocks will fare when they report earnings.
Stock Index Futures
The most watched indicator for how the stock market will open are the stock index futures prices. Futures trade 23 1/2 hours a day -- through the night and early morning. Trading in futures when the stock market is closed focuses on what traders think the stock market will do when it opens. The investment news sources -- both online and on cable -- quote the futures prices early in the morning. The level of off-hours futures trading is much lighter than when the exchanges are open. As a result, the before-market futures prices are an indicator, but they do not have a big effect on how the market opens.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.