Without a shade of doubt, Market Wizards books have been a staple in the upbringing of whole generations of traders and investors, and rightfully so… we ourselves have been inspired by the exceptional stories within them.
The series, authored by Jack Schwager, began in 1989: what has made it so enduring is not the trading insights alone, but the human stories behind them, of rigor, discipline, and the ability to learn from failure.
The sixth book in the Market Wizards series is due out this June, and ahead of its release, Jack Schwager and co-author George Coyle joined host Moritz Seibert on the Top Traders Unplugged podcast to discuss what readers can expect.
What caught our attention is that the book profiles a new generation of traders, some of whom built their initial fortunes doing things the original Market Wizards would have likely warned against… like shorting small-cap stocks.
Driven by curiosity, we decided to revisit a signal that has been sitting in our internal archives for some time, one we believe lends itself to some important considerations around intraday short selling.
Identifying Stocks to Fade
Over the past years, some of our internal research has focused on short-term opportunities in single stocks. Notably, one particular family of signals kept emerging as meaningfully predictive of intraday returns, especially within the less covered segments of the US market.
We document a distinct tendency for stocks that experience abnormally large overnight gaps to revert those moves during the subsequent intraday session: at its core, such gap-fade behavior can be interpreted as a short-term mean reversion effect.
This dynamic is also well supported in the academic literature: Akbas et al. (2022) point to a persistent tendency for positive overnight returns to be followed by negative daytime reversals in US stocks, while Stübinger and Schneider (2019) build a statistical arbitrage strategy around the same mean-reverting property, finding it to be particularly significant in the first two hours after market opening.
The specific stock selection criteria we tested are summarized at the end of this article.
Our analysis covers the period from January 2012 through mid-May 2026, and the gross-of-costs results (shown in the chart above) are striking: the headline figures report a CAGR of roughly 98% and a Sharpe ratio of about 2.08, with a maximum drawdown of around 67%.
Therefore, even though this signal can look risky on the surface, it has historically carried substantial predictive power, suggesting that the new generation of market wizards has indeed been exploiting a genuine edge.
But before getting carried away, we think such short-selling framework comes with important caveats, and there are a couple of central points worth discussing in greater detail.
The Bad News
If you are not an experienced quant, the equity curve above is probably already getting you excited about two things: becoming wealthy in a matter of years and earning your place in the next edition of Market Wizards by following a simple set of rules.
Unfortunately, reality is a lot different.
Market Frictions
Identifying a strong signal is not the same as having an economically viable strategy. Our analysis was intentionally kept gross of costs, because that is what the first steps of quantitative research look like: we isolate the raw predictive component before layering on the real-world frictions.
A complete research pipeline would then move on to estimating those costs, namely commissions, market impact, and, in this case, the cost of borrow: unfortunately, this signal we tested ticks every box for facing brutal frictions.
Given that it operates intraday, trading activity is elevated, making fees a meaningful component of the total cost equation.
On top of that, there is market impact. We typically model it through the I-Star framework, which punishes large orders in illiquid and volatile names. We expect extreme gappers, by design, to sit at the volatile end of the spectrum, and although our universe already excludes roughly the bottom 30% least liquid names in the Russell 3000, the remaining stocks still include plenty of names with thin liquidity.
To top it off, shorting introduces its own set of obstacles. Locating shares to short often requires specialist brokers that deal in hard-to-borrow (HTB) names, since every short sale must be backed by a confirmed locate. For some tickers locates may be unavailable precisely when the opportunity to go short presents itself, and when they are available, their cost can be punishing.
Put together, any realistic net-of-cost picture would look meaningfully different from the 98% gross-of-cost figure shown above.
A Structural Break?
From 2022 onwards, something clearly changed. The equity curve peaked in the first half of that year and has since given back a substantial portion of prior gains in a drawdown that continues through today. In the language of academic finance, the abrupt and persistent breakdown of a well-specified signal is known as a structural break.
The most plausible explanation we have found is rooted in crowding effects: in recent years, as short-selling infrastructure has become more accessible and data more widely available, more capital began competing for the same set of (attractive) opportunities.
Adapting for Survival
The traders profiled in the new book were clearly benefiting from an edge that was genuinely strong while they built their track records, and we suspect that their discretionary skills played a major role in amplifying that edge as well as absorbing the market frictions discussed earlier.
For instance, in a separate study of ours, we have documented that a layer of discretionary decision-making by a skilled trader can turn an otherwise unprofitable systematic signal into a profitable one.
Whether the same approach to shorting small-caps can sustain a new generation of wizards is a much harder question to answer optimistically, and it brings us to a broader point on the importance of adaptation.
In the 1980s, the Turtles became wildly successful by operating relatively fast trend-following rules that wouldn’t generate the same impressive results if applied mechanically today: the edge was exceptionally strong when it was first captured, and then it gradually faded.
The same may well be true of the intraday gap-fading approach that some of the new Wizards have harvested for several years.
The ability to adapt as signals become stale is, in our view, a defining quality of the durable trader, whether discretionary or systematic. Markets are a bit like the sea… moving in ebbs and flows: even when the surface looks calm and everything is going well, we must be prepared, as we never know when the tide will change.
We would be glad to hear from traders who have made short-selling a cornerstone of their approach. Feel free to leave a comment, or reach out by direct message or email at info@concretumgroup.com with any questions or thoughts.
Full Methodology
In the following table, we describe step by step the rules we used to construct the strategy presented in this article.