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There is a simple reason why the tail wags the dog. It is easier to
execute an index trade by trading the future than trading the individual
stocks. Therefore a large institutional buyer or seller will trade the
future first, then arbitrage the future into the stocks. For example,
when a decision is made to reduce exposure to stocks from, say 55% of
assets to 50%, then is done immediately by a futures trade. This causes
the future to lead the index down. When the cash index catches up to the
future, then the two sides are unwound together.
Dan Goncharoff
Earl Adamy wrote:
>
> Had you said that on many occasions the tail _tries_ to wag the dog, I would
> agree. This happens routinely with the futures reflecting premium or
> discount appropriate to the direction in which the futures pit believes the
> cash market will move. However, the premium or discount are constantly
> subject to reality check with the direction of the cash market. The
> difference between fair value and premium is characteristic of options. One
> of the functions of the futures market is to anticipate moves in the cash,
> however I think it is dangerous for traders to believe that the futures
> market leads the much larger and much more diverse cash market.
>
> Earl
>
> -----Original Message-----
> From: Ira <ist@xxxxxx>
> To: eadamy@xxxxxxxxxx <eadamy@xxxxxxxxxx>
> Cc: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Date: Saturday, January 30, 1999 10:06 AM
> Subject: Re: Dow Jones Industrials Futures
>
> >On many occasions the tail wags the dog. The SnP future will start its
> move
> >before the indexes. That is why the premium expands. A prime example
> would be
> >what happens in the morning when the night session takes the future down or
> up
> >several points. It could be the hedge funds, the arbs or anyone else, it
> >doesn't make any difference, when the price moves you either make or lose
> >money. Ira
> >
> >Earl Adamy wrote:
> >
> >> I suppose this is subject to some interpretation, however I'm of the
> opinion
> >> that wherever the dog (cash market of s&p stocks) goes, the tail
> (futures)
> >> will follow. This is not to say that there is not arbing of cash to
> futures
> >> which shows up in the premium differential to fair value and that the
> >> size/direction of that differential is not, at times, a good indication
> of
> >> market direction. Also, one should keep in mind that only a small
> percentage
> >> of the pit trades are reported via real-time feed and that those reports
> lag
> >> the actual trade by the time required for the pit clerk to manually enter
> >> the trades.
> >>
> >> Earl
> >>
> >> -----Original Message-----
> >> From: swp <swp@xxxxxxxxxx>
> >> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> >> Date: Saturday, January 30, 1999 8:15 AM
> >> Subject: Re: Dow Jones Industrials Futures
> >>
> >> >The futures prices tend to lead the cash market, at least in the S&P
> >> >500. I assume it is also so in the Dow.
> >> >
> >> >Steve Poser
> >> >--
> >> >Steven W. Poser, President
> >> >Poser Global Market Strategies Inc.
> >> >http://www.poserglobal.com
> >> >
> >> >> Brendan R Smyth wrote:
> >> >>
> >> >> Is it feasible to day trade DJI futures contracts by monitoring price
> >> >> movement on the actual index with e.g. a 1-minute bar chart or do you
> >> >> need to monitor price movement on the contract you are trading?
> >> >>
> >> >> Anyone with comments or advice appreciated
> >> >>
> >> >> Brendan Smyth
> >
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