Expert: Sonoma - 3/30/2001

Question
If the S&P Futures Indicator is below the cash S&P index, this is an indication that stocks are headed lower, right?  For instance, right now, 2pm Friday, 30 March 2001, $PREM.X is 1033 and the S&P Index is 1154.1.  Consequently, it would be best to refrain from going long, except for some exceptionally favorable play.  Is this correct or not?  What circumstances do you feel would be an exceptionally favorable play?  

Answer
"Fair Value" is computed at the beginning of the trading day and is constant throughout. It is found using the formula:

FV = S [ 1 + ( I - D ) ]

where:

S = the S&P 500 Stock Index.  The ticker symbol is SPX and/or INX on most data feeds;

I = the amount of interest paid to your broker to borrow the money to buy all of the stocks in the S&P 500 Index. The interest is calculated based on a percentage lending rate (R) from the current date (today) until the date that the S&P Futures Contract expires (H, M, U, or Z);

D = the amount of Dividends paid to you from all of the companies that you own in the S&P 500 Index. The dividends are paid to you based on the record dates for each stock in the Index that are announced between the current date (today) and until the date that the S&P Futures Contract expires (H, M, U, or Z). This dividend income is expressed as a percentage rate too.

In other words:

Fair Value is the value of S&P 500 Index, plus the interest I pay my broker to buy all of the stocks in it, minus all of the dividend checks I get from those stocks.

For example, on Friday, March 30, 2001 "Fair Value" was 9.12, "premium execution levels" (or $PREM) for "buy" programs set at 11.50 and the "sell" programs at 7.04. (Though the FV levels are static for the day, the PREM levels are dynamic).

Obviously, I would not want to be short when program buy levels are hit, and vice versa.

Please contact me with further comments, etc:

sonoma@extremedaytrading.com

Sincerely,

Sonoma