How to interpret the movement of stock index futures, in regards to regular market movements

In the hours before the stock exchanges open for the day, financial news reporters often discuss the latest developments in stock index futures.

I'm curious how to interpret the developments they are discussing.

• Should I interpret it as: the developments of futures are indicative of where the actual stock indices may be going? How strong is the correlation, generally?

• If futures contracts on the S&P 500 fall in value, would that imply that the market believes that the market will develop more positively?

• Are the stock index futures usually "rolling" or is a future for a certain upcoming contract month commonly used? How much does it matter when the future was issued?

• Is there any other basic knowledge I should have when it comes to this topic? I am familiar with the concept of what a futures contract is, but I'm not entirely sure how futures relate to the interest given to the normal markets.

2 Answers

When both the spot and futures markets are open, the futures price is related to the spot S&P level via the equation $F = S e^{(r-d)t}$. t is the time (in years) between now and the contract expiration. The March contract is expiring soon, so the most active is actually June.

The difference between S and F is called the 'basis', and with current dividends and interest rates is about 9 S&P points for the June futes. The basis will converge to zero as the expiration date approaches, but on any given day and for small moves in S&P it is approximately constant.

At night, when the futures are open and the stock market is closed, the futures do a pretty good job of trading based on "where the stocks would be if they were open" and the two come back in synch the next day.

Equities futures markets and equity indices move essentially in lockstep almost all of the time. Hence when the stock market is not open, the futures provide an excellent indication of where the market is likely to go when it opens. Yes, they are always talking about the 'front month' futures contract. Right now that would be the March 2016. They roll every 3 months in US equity futures, so soon we will be talking about the June contract. You can consult any decent text of