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Doug--
I learned what Fair Value means via CNBC's Squawk Box and use it each
morning as an accurate indicator for the stock market's movement early in
the session. Fair Value is the mathematical relationship between the SP
futures and the SP 500 index which is referred to as "the cash." It is the
spread between the futures and the cash at which those two markets are in
equilibrium.
To professional investors, when the spread is at fair value, it makes no
economic sense to them whether they own futures or the actual stocks that
make up the SP 500. But when the spread drops below fair value or moves
above it by a large enough margin, then one of the choices (buying stocks
or futures) will become more attractive than the other. The pros will buy
one and sell the other, impacting the stock market one way or the other.
Fair Value changes during the day. Check the CNBC ticker: Look for PREM,
the actual spread or premium, followed by FV for Fair Value. When PREM is
more than FV there is a bias in the market to the upside, and when PREM is
smaller than FV the bias would be to the downside.
I check only during the last half-hour prior to the stock market open and
use the SP futures, which is already trading, to get an idea of where the
market is heading at the open. The PREM and FV on the ticker at that hour
show where Fair Value closed the previous trading day. Then I check the
screen for the current SP futures indicator. If, for example, PREM is ahead
of FV by a point and the SP futures are up 2, 3 or 4 points or more, the
market is almost certain get off to a very positive start. If however, PREM
is below FV and futures are trading down, I expect a down opening. It is a
short-lived phenomenon but quite reliable.
There is, of course, more to it, including a formula. You can get more info
from cnbcsquawk@xxxxxxxx
bob nelson
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> From: DWBush <DWBush@xxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Subject: DETERMINING "FAIR VALUE"
> Date: Sunday, March 01, 1998 4:48 AM
>
> Good Morning Everyone:
>
> I currently do not trade in the Futures Market, but have one question for
now.
> I hope someone can help me to better understand this point.
>
> Every morning I listen to BLOOMBERG radio and I hear the announcer talk
about
> where the futures market stands, relative to overnight trading. He
generally
> makes a comment like: "... futures are up 5 points; that's 3 points
above
> fair value. This indicates a very strong opening on Wall Street."
>
> I hate to waste anyones time, but if someone would please help me
understand
> "fair value" I would really appreciate it. I can't seem to understand
what
> the relationship is here.
>
> Thanks ahead of time!
> Doug (Bush)
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