By Sarah Morgan
The wild swings of the past week have kept many investors tracking market news a lot more closely than they usually do, and the first round of headlines every morning often focus on futures. But whether they’re up or they’re down, what do stock futures really tell us?
Futures essentially give investors a preview of what’s likely to happen when the U.S. stock markets open at 9:30 EST. “If futures are up 1% it’s an indication that the market should open 1% higher,” says Paul Nolte, the managing director of Dearborn Partners.
The original futures were developed as a way for farmers to lock in a reasonable price now for crops they’ll harvest later, says Brian Overby, an options analyst for TradeKing. Two parties negotiate a price for a product at some point in the future. They don’t exchange the money then, but (unlike an option) they’re obligated to make the trade at the negotiated price on that date, Overby says. The price of a stock-index future is generally very close to the price of the actual index, and because these futures start trading before the stock market opens, they give an early indication of what should happen when it does, he says.
Under normal market conditions, the opening moves of the S&P 500 should follow what index futures have done almost exactly. Thursday morning, however, the picture was a little cloudier. “When I looked 6:00 central time, futures were pointing to maybe a 100-point gain,” Nolte says. “When I got to the office at 7:30, before the jobless claims numbers, we were down 100. About 10 minutes before the open, futures were indicating up 100. So in the span of about two hours we went from up 100 to down 100 and back again,” he says. That doesn’t mean futures were wrong, Overby says. It just shows that, like the action during normal trading hours, pre-market trading has been more volatile than usual, he says.
Even at the best of times, however, futures only give you a snapshot of that moment’s market sentiment, says Kevin Mahn, the chief investment officer for Hennion & Walsh. “All it tells you is the sentiment that’s going into the current market from the previous day’s market, and whatever’s been going on overseas,” Mahn says. As new information comes out, that sentiment will change, he says. It’s one piece of information that can help an investor get a sense of what the market will be doing, but it’s just one piece of information, he says.