S&P 500 close problem

[tuzu]

The 'official' end-of-day close of the S&P 500 is often not yet final at 4pm. If I feed the 4pm price to the model and get my signal and place my trade, then the final price may be different and would perhaps have lead to another signal. What is the best way to deal with this?

[Jim Witkam]

This is the general problem that end of day (EoD) market prices are often not final yet at the time that the regular market session closes. (This is caused by trades that occured before the close but haven't been fully processed yet).

The best way to deal with it depends on the size of these price adjustments. If they are small, then the chance that they have an impact on the signal is very small. To get the new forecast and signal a.s.a.p, the first available EoD price at 4pm could be fed into Adaptive Modeler. Don't save the model yet, so later when the final EoD price has been written to the quote file (replacing the early one), you can re-open the previously saved model so it will process the final "official" EoD price. In the rare case that the signal is now different, you will have to change your position (if you already acted upon the preliminary signal before).

If the price adjustments are relatively large, then the chance that this could affect the signal is also larger. In that case it may be better to wait some more time before generating a signal and place your order later in the extended hours session.

Alternatively you may even want to place your order the next day (provided that the price is still near or at the preferred side of the last close) since this would also avoid overnight positions.

The best strategy depends on the size of the EoD price adjustments (which mostly depends on the amount of trading activity during the regular session), the volatility during extended hours (which may depend on something else) and your willingness to have overnight positions. If the volatility in extended hours is low than there is time to wait until the EoD price is final. But even when extended hours volatility is high, there are usually still opportunities to trade at/near the EoD price during extended hours or after the next day's open.

[Jim Witkam]

In addition, another strategy is to "look ahead" to what the next forecast and signal may be going to be by entering an expected EoD price in the quote file some time before the market closes. Then let Adaptive Modeler process this quote (temporarily, without saving the model!) to see what the forecast and signal (if any) is going to be.

By repeating this a few times with expected prices below and above the current price, you can find the (approximate) threshold prices between long/cash/short signals. If the market seems sufficiently stable within threshold prices then the signal could already be considered "final" and a trade could already be made before the regular session closes.

This also avoids the high volatility often seen just before the close and at the start of the extended hours session.