Fair Value Alert

This relates to the S&P - but stock traders would want to be aware of it as well.

Premium is the difference between the current S&P Future contract and the S&P Cash. Normally, the Future is ahead of the Cash, in anticipation of where it will be at its future expiration.

Each morning on CNBC and BMI news (and other news services) you will see an announcement for "S&P 500 Fair Value." This value is theoretically where the Premium "should" be. That is, how much difference there should be between the cash and the future for there to be a "balance." (The complexity of this issue reaches far beyond the scope of this tool description, as it involves a complicated algorithm involving current interest rates, time until expiration, etc.)

Suffice it to say, the news services will give three values on the Fair Value report:

• The actual Fair Value
• A higher called Fair Value Buy, and
• A lower value called Fair Value Sell.

The general consensus is that if the Premium goes up to Fair Value Buy, the large institutions will start program buying, and visa versa. As a trader you might want to know about this as it could move the market.

Beth will announce these occurrences.