Can Futures Market Predict the Stock Market?

Index futures are derivatives that look to predict where something will be in future. We can use them to get an idea of stock market direction. Learn more about how stock futures work and how they can help predict stock market direction.

Can Futures Market Predict the Stock Market?

Index futures are derivatives of real indices, which look to the future to set a future price or try to predict where something will be in the future. Since there are index futures (S&P 500, Dow 30, NASDAQ 100, Russell 2000) that trade almost 24 hours a day, we can use them to get an idea of the direction of the stock market. Futures will move based on which section of the world is currently open, so the 24-hour market must be divided into time segments to understand which time zone and geographic region are having the most impact on the market at any given time. Futures track stock prices around the clock, while stocks only trade and track prices during the trading hours of the exchange they are listed on.

Stock futures are not so much a prediction as a bet. 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. The concept of futures quickly expanded to other fields of economics and investment, including oil contracts and, of course, stocks.

The buyer of the futures contract must buy (and the seller must sell) the specified asset at the contract price, regardless of the current market price at the time the contract expires. S&P 500 futures contracts, on the other hand, are traded 24 hours a day in different markets around the world. 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. 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.

A buy or sell order for 5000 E-mini S&P contracts could move the futures market several points during the night market, while a similar trade would have much less effect during the day, when the hourly volume normally exceeds 100,000 contracts. During earnings season, virtually all earnings announcements are made before or after the cash market.Bottom Line index futures predict the opening direction of the stock market most of the time, but even the best fortune-tellers sometimes get it wrong. Some investors are looking in future for clues as to which direction a stock index could move when the market opens on a given day. However, for storable commodities with sufficiently large inventories, future prices simply reflect the spot price plus maintenance costs.

Your vision may be perfect, but it can also be very out of place. Agriculture is a risky business, and contracts gave farmers a way to set prices before going to market.To complicate matters even more, a company that needs to forecast oil prices within six months can sometimes turn to the futures market for a reliable forecast, but other times it can't. By taking advantage of expected high prices in future and storage capacity of oil, arbitrators push spot price higher and price of futures lower. However, most days they don't offer economic reports that change market or random non-financial events that have an effect on market.

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