Market Strength: S&P 500 Futures
  1. Market Strength: Introduction
  2. Market Strength: S&P 500 Futures
  3. Market Strength: Advancers to Decliners
  4. Market Strength: Relative Strength Index and Arms
  5. Market Strength: Oil and Bonds
  6. Market Strength: Conclusion

Market Strength: S&P 500 Futures


If you've ever watched financial television before or after the markets open you will probably notice that they often quote the latest index futures price on the "bug" in the bottom corner. The futures market is an important concept and can be used to gauge the trend of the market.

Futures
There are two types of futures contracts, financial and commodities. No matter which type of contract you buy the basic premise is the same. The buyer of the contract agrees to deliver the product (or cash for financial futures) at the contract price on the expiry date. A contract can be on anything from corn, wheat, oil or, in our case, a stock index. It should be noted that a majority of futures contracts get "closed out" before the delivery date and so no physical delivery actually takes place.

The Standard and Poor's 500 index (S&P 500) contains many of the largest companies in the world, so it only makes sense that movement in the direction of the S&P futures is one of the best indicators of overall short-term market direction (Note: The Nasdaq futures are considered a good indicator of technology stocks). The word futures might make this indicator sound confusing but it really isn't. If S&P futures are up, it's an indication that there is upward pressure on the market and the stock market will tend to rise. On the other hand, if S&P futures are down, it's a sign that there is downward pressure on the market and it will likely trend lower.

This rise or decline in the futures contract is usually calculated as a change from fair value. Fair value is the equilibrium price for a futures contract. This is equal to the spot price after taking into account compounded interest and dividends lost because the investor owns the futures contract rather than the physical stocks. This price is determined over the period of the futures contract.

Arbitrageurs
Part of the reason that the markets follow the trend of futures contracts is because of arbitrageurs. An arbitrageur is someone who simultaneously purchases and sells a security (or index) in order to profit from a differential in the price, usually on different exchanges or marketplaces. For S&P futures contracts here is what happens: Suppose the futures contract is trading above fair value (higher), before the market is about to open. An arbitrageur will sell (short) the S&P futures contract and go long (buy) on the underlying stocks within the S&P 500 index. Therefore, the stock prices will increase until the S&P 500 index reaches fair value with S&P futures contract. This sounds like a lot of work but really isn't because of program trading. Using software that monitors both a stock index and futures contracts on the index, traders can be notified when there is a larger than normal gap. This strategy is commonly referred to as index arbitrage.

Popularity
The main reason that S&P futures are so popular for detecting strength is because this contract trades 24 hours a day on financial exchanges around the world. It allows traders and brokers to gauge the futures level before the actual stock markets open for trading which gives a sense of where the market is likely trend at the start of trading.

Market Strength: Advancers to Decliners

  1. Market Strength: Introduction
  2. Market Strength: S&P 500 Futures
  3. Market Strength: Advancers to Decliners
  4. Market Strength: Relative Strength Index and Arms
  5. Market Strength: Oil and Bonds
  6. Market Strength: Conclusion
RELATED TERMS
  1. Futures

    A financial contract obligating the buyer to purchase an asset ...
  2. Index Futures

    A futures contract on a stock or financial index. For each index ...
  3. Futures Contract

    A contractual agreement, generally made on the trading floor ...
  4. Fair Value

    1. The estimated value of all assets and liabilities of an acquired ...
  5. Limit Move

    The largest amount of change that the price of a commodity futures ...
  6. Currency Futures

    A transferable futures contract that specifies the price at which ...
RELATED FAQS
  1. What do the S&P, Dow and Nasdaq futures contracts represent?

    Every morning before North American stock exchanges begin trading, TV programs and websites providing financial information ... Read Answer >>
  2. How is fair value calculated in the futures market?

    Learn how the fair value for futures stock index contracts is calculated, and understand how differences between those numbers ... Read Answer >>
  3. How do S&P 500 futures work?

    Learn about the mechanics of S&P 500 futures contracts, a type of stock index future introduced by the Chicago Mercantile ... Read Answer >>
  4. Why do futures' prices converge upon spot prices during the delivery month?

    It's a fairly safe bet that as the delivery month of a futures contract approaches, the future's price will generally inch ... Read Answer >>
  5. What types of items can you buy futures for?

    Learn what items futures may be purchased for, what a futures contract is and discover how the futures markets have greatly ... Read Answer >>
  6. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>

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