Monday, January 15, 2018

An Observation

The study below was done to see if casual observations made at the end of the session were borne out in fact. The observation was that as recent days futures contracts were closing at the settlement, they seemed to be trading quite oddly.

Daily Settlement - Futures Discount to Cash

You can see from the above chart that for almost the entirety of the Primary 5th wave, since February 15th, 2016, above, the daily ES E-Mini S&P500 futures contracts had been closing with a discount to cash. That is, on settlement, the futures price settled lower than the equivalent cash price. This is usually thought to be that because the futures have a limited life span, and do not pay dividends like the cash market does, then there is a slightly reduced value to the futures contract.

The chart above is a daily chart. For almost two full years of daily data points, we see this typical relationship held true. Only exceptionally rarely did the futures trade at a greater value than the zero line, and then only minimally so. But only recently, after or coincident with the passage of the tax cut, the futures have been trading at an unmistakable premium over cash.

Is there a sound economic reason for this - as the explanation for the usual discount above? Or is this one of the ultimate signs of froth and excessive bullishness in the market - and that valuations are out of kilter?  If people were figuring the tax cut contributed to S&P earnings, why wouldn't such values be applied cash as well as futures??

Only you can decide for yourself. We can only show the findings.

Have a very good start to your week.


  1. Joe, the only possible reason I can come up with is that the Futures allow trading 24hours a day and people are paying a premium for that in case they need to get out in a hurry.

    If an 'EVENT' (whatever that might be) happens outside of normal trading hours then the gap down in the Cash Price could be too severe. Hence an 'insurance premium' for the ability to get out quickly at any or night.

    I do however hope this is one of those 'tests' where you give us the correct answer in the next post.


    1. Yes, but that is always the case. Why would that have changed?

    2. The reason I think it has changed is that people's expectations of an 'EVENT' happening imminently has increased.

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