Can Stock Market Futures Predict the Future?

Stock market futures are not always reliable indicators of future stock movements. Learn more about how stock futures work and how they can be used as an indicator.

Can Stock Market Futures Predict the Future?

When it comes to predicting the future of the stock market, futures are not always a reliable indicator. Futures represent a bet that a stock or index will move in a certain direction, but they don't always accurately predict the direction. Before the opening of the US market, it was known that Europe was weak and that the United States would start with lower prices. This is what is known as a downward gap in openness, but there really wasn't any gap depending on how the futures were traded.

So, in this case, did the futures lead the S&P 500 index lower? Not really. If the S&P 500 index were calculated over the night, you would see the same pattern. Major economic reports that confirm an existing trend generally result in a comprehensive movement of futures and a similar movement of the open-air cash market. Similarly, important reports that indicate a strong change in conditions often cause a reversal in the futures market and a similar movement in the cash market.

Monthly economic reports with the power to move markets include the Consumer Price Index, personal income and outlays from the Department of Commerce, and the Department of Labor's Summary of Employment Situation. Also important are gross domestic product announcements, which are published quarterly in two reports, the anticipated report and the final report. A stock futures contract is a commitment to buy or sell shares at a certain price in the future, regardless of their actual value at that time. The prices offered for futures contracts are based on market orientation for investors.

Interpreting future prices is somewhat more complicated for storable commodities where current inventories are low compared to current consumption needs. That leaves 73 percent of the time the US markets do not represent what is happening all over the world. By taking advantage of the expected high prices in the future and the storage capacity of oil, arbitrators push up spot prices and lower futures prices. Investments, including political and economic risks and exchange rate fluctuations, all of which may increase in emerging markets, can also affect stock market futures.

Unexpected events—a war, a terrorist attack, a market panic—devastate the market precisely because no one saw them coming. If you're looking for information and see traders offering a lot of futures contracts below yesterday's closing price, that's a sign that the expert consensus is that the market is plummeting. When regular trading opened the next day, all market participants were able to react and set higher long-term stock prices. Occasionally, a significant non-financial event causes a drastic movement of futures outside cash market trading hours.

Stock Futures Aren't So Much a Prediction as a Bet - they can be used as an indicator but should not be relied upon as an absolute predictor of future stock movements.

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