Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 166

above the last session's close, it is 3 points below the fair value, thus the possibility of the weaker open.

After-Hours Futures

The S&P futures regular trading hours on CME is between the hours of 8:30 AM and 3:15 PM EST. This means that S&P 500 futures contracts are traded regularly one hour prior to the 9:30 AM EST stock market open. Moreover S&P futures are also traded outside regular hours on the CME's electronic trading system known as GLOBEX2 (or just plain GLOBEX). You may be starting to get the picture now. If one looks at the value of S&P futures prior to the stock market open, could it indicate a direction for the stock market when it opens for trading? Well, yes and no. Yes, the value of the S&P futures just prior to the stock market open definitely points to where the market will be going immediately at the open.No, because there is no way to know where the stock market is headed for the rest of the trading day.

Let's look at the example we used before. If the fair value for S&P futures is 1,425 and just prior to the stock market open S&P futures are trading at 1,430, this indicates a 5 point premium over fair value (we also assume that the cash or real value of S&P 500 is 1,400). Such premium would always indicate that the S&P 500 would rise immediately at the market open. In order for this to happen the stock prices making up the S&P 500 would rise collectively at the open.Why is that? When S&P futures are traded above fair value, it signals an imbalance between the fair value of S&P 500 futures and the actual level S&P 500 futures. In order for this imbalance to be corrected, the S&P 500 must rise enough (and the S&P futures must fall enough) so the fair value is reached halfway. This means that cash value of S&P 500 may rise to 1402 or something in that neighborhood and S&P futures may fall to 1,422 or so - a two point rise for S&P 500 immediately at the


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