I am often asked… ‘Why do you focus so much time and effort on analyzing the E-Mini S&P 500 Futures Options –and why should a regular investor who does not trade futures options care?’
My answer… ‘If you want to hold on to your precious trading capital and greatly increase the odds of prospering with individual stocks in your portfolio, you should most definitely care about the S&P 500 Futures Options.’—and here is why…
In the late 1990’s, when I first starting posting my analysis on the Internet, a hot topic of discussion was ‘market manipulation’. In those days, most traders thought that markets were fair and efficient. Today, many traders accede that something highly-structured and expertly-organized appears to be going on behind the scenes, and now accept that the markets are probably controlled for the benefit of the insiders (whom I often refer to as the ‘pros’ in my commentary).
My proffered opinion throughout the years has always been…’I can’t personally prove that the markets are manipulated, but they certainly behave and trade as if they are—and so I will go with what has worked and continues to work for me, which is to assume that they are–and to strategize accordingly.’
I always try to put myself in the shoes of the ‘pros’–to perceive the market opportunities the way those insiders see them, and to anticipate their next logical moves as they maneuver to exploit opportunity and to maximize their own gains in both bullish and bearish swings.
To understand current broad market trends and to predict likely insider price targets, I focus my attention on the futures markets, and specifically the S&P 500 E-Mini contract because that instrument, more than any other, is ‘the tail that wags the dog’. To understand what I mean by that phrase–one needs to understand the concept of index arbitrage…
The cash markets almost always follow the lead of futures contract pricing as a result of the effect of arbitrage. An arbitrageur is an entity or more likely a trading program that simultaneously purchases and sells a security (or index) in order to profit from a differential in price, usually on different exchanges or marketplaces.
In the case of the S&P 500 Futures versus the S&P 500 (cash) Index, arbitrageurs are compelled to buy one and sell the other to exploit a price difference until both find equilibrium. For example, let’s say the futures contract is trading higher than the cash index at the market open: arbitrageurs will sell (short) the higher valued instrument, which in this case is the futures contract, and buy the underlying stocks within the S&P cash index. The opposite is true when the relative values are reversed: if the futures are trading below the cash market, the arbitrageurs will buy the futures contract and sell the underlying stocks within the S&P cash market index.
So, let that sink in for a bit…
S&P 500 Index Futures contracts are highly-leveraged derivatives, which means they are simply a side bet on a value ‘derived’ from the actual value of real companies with real assets in the cash market. Paradoxically, those paper-only derivatives are used to easily push around the real component stocks of the cash market index (the current market cap of the combined S&P 500 component stocks is measured in trillions, with a ‘T’, of dollars!).
The cost to manipulate futures contract prices when the cash markets are closed is laughably cheap compared to the amount of real money it would take to actually move the cash markets during regular market hours. So, that is why I say that ‘futures are the tail that wags the dog’.
Another old insider’s market adage that applies here is subtle in wording, but powerful in meaning…
‘The markets do not move—but rather, they are moved’.
So, if you really want to know where the market is heading (being pushed to) and why, it is best to study the instrument that is being used by the pros to guide it, right?
No publicly-available analysis of which I am aware, has been more accurate in identifying trends and major reversals in the broad market than what you will see written here in this blog. That bold claim is backed up by years of archived examples <see the archived entries dating back to 2009 on the right side of this page>, which have caught and documented every major turn in near real-time, without exception!
My analysis here usually incorporates two graphical components:
1) My annotated charts
2) Automated analytics from Stops and Targets
In my writing, I explain the techniques used on my charts and often also include screenshots from Stops and Targets as a check against my own analysis. I find that Stops and Targets helps to eliminate analytical mistakes that I would otherwise make…by forcing me to consider pure machine-driven logic, which is exactly how the pros operate. While I usually focus on the broad market in my posts here to describe the overall ebb and flow of macro trending momentum, Stops and Targets provides the same type of automated analysis for thousands of individual equities, which can empower you to check your own ideas and strategies, in both bull and bear markets, against an impartial and unbiased digital referee.