How do the futures before the bell influence the
direction of the market?
There is almost a never ending chain of things that you
can buy options or futures on. For instance although you
can buy a stock, you can also buy options on that stock.
Well, it goes the same for the major indexes like the DOW,
the NASDAQ and the S&P. You can buy futures AND options
against where you think they will go. For instance you may
think the DOW is going to have a huge up day so you buy
options that will reward you if indeed the DOW gains 100
points that day. The institutions and financial banks buy
and sell futures contracts against the indexes every day.
Some of it is for profit, while others are for "hedging"
or in other words taking a position opposite their biggest
positions for "insurance" purposes. (if their biggest
position is long, they may short futures and if the market
goes against them, their long position will suffer, but their
"short" position will take up some of the slack.)
Now what happens is that there is a computation that comes
into play and the equation is "fair value to the cash".
When the "spread" between where the indexes actually are
(in actual point value) and the money that has been "bet'
on the futures gets too wide, this will cause a reaction.
For instance lets say the S&P futures are showing a +5 points,
but "fair value" to the cash is a negative 3 points, chances
are pretty darned good that program trades will fire off and
the market will jump up out of the gate. Why? Because the spread
between where the futures contracts are selling and the actual
fair value compared to where the actual index is, is so great,
that traders will dump the futures,(actually selling them short)
take the money and buy stocks.
On the other hand when the futures are selling at a discount to
the fair value and say we have the futures down 5 while fair value
is a positive 3, then traders will dump stocks in favor of those
discounted futures.
So as you can see, the futures absolutely do determine where the
market will go at the opening bell. Now that isn't to say that
just 3 minutes later it won't reverse itself, but most of the
initial trading is program trading that mathmatecally figures
the fair value and the profit/loss potential of either selling
or buying the futures. Once the initial trades fire off, it is
the human factor that will then determine if the buying or selling
will continue. Watch one of the financial cable channels in the
morning if you have access. CNBC shows it on the right
hand side of the screen before trading begins and you can see it
in real time.
edit: Once again, please keep the spam off the forums . . .
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