|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.