How will the stock market do tomorrow? Here’s how Stock Futures can be a reliable indicator to that question

How will the stock market do tomorrow? All investors wonder this question, yet the only way they know for sure is how the market performs when it opens. That said, there is one indicator to tell…namely, futures. It is often perceived to be a reliable indicator…if you’ve ever watched Bloomberg or another financial news outlet just prior to the open of a market, you may see journalists and analysts use it as an indicator. But just how do these futures work, and are they really reliable?

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Futures: The way to answer the question ‘How will the stock market do tomorrow?’

Futures, in general terms, are financial contracts where two parties agree to buy or sell an asset (like commodities, currencies, or stock indexes) at a predetermined price at a specific date in the future. Futures can be used for speculation, hedging, or investment purposes. In the stock market, stock index futures (like S&P 500 or ASX 200 futures) are the most relevant to this article.

Stock index futures are often looked at as indicators of how the stock market will perform in the short term, especially the next trading day. Since futures markets trade almost 24 hours a day, they react to economic data, global events, or corporate news before regular stock markets open. If ASX 200 futures are trading higher overnight, it suggests that investors expect the stock market to open positively the next day. Conversely, if futures are trading lower, it indicates a bearish sentiment, suggesting a negative opening for the stock market.

How do they work?

Stock market futures are financial contracts that obligate the buyer to purchase, or the seller to sell, a stock index at a predetermined price on a specified future date. Futures contracts are often tied to major stock indices like the S&P 500, Nasdaq, or the ASX 200. Instead of trading individual stocks, stock index futures represent a group of stocks and allow investors to speculate on the overall market direction.

The ASX 200 Index can be traded for two periods per day. The first is from about 5pm-7am or 5pm to 8am during US non-daylight saving time (early November to early March). The second is 9.50am to 4.30pm Sydney time all year around. Contracts typically are made on a quarterly basis, no more than six ahead, ceasing at 12pm on the third Thursday of the settlement month.

Are Futures Really Reliable Predicting Market Movements?

While futures provide insight into market sentiment, they are not a perfect predictor. Their reliability can vary based on several factors. One of these is short-term Reflection – Futures reflect market expectations in real time, but they can change rapidly based on new information. For example, if a major news event occurs, futures could swing dramatically. The Influence of Global Markets is arguably a more important factor overall, particularly the direction of the US market.

You can see that Futures are very sensitive to short-term news and events, making them highly volatile. This means overnight futures may not always predict the full day’s market performance accurately. Also, consider that the market can open following futures predictions but may reverse quickly due to more fundamental market conditions or events that occur during trading hours.

Conclusion

Futures, specifically stock index futures, can give an indication of market sentiment for the next trading day, but they are not foolproof. They are more reliable for gauging short-term sentiment and potential opening movements rather than predicting the entire day’s performance.

So they may give a clue as to ‘How will the stock market do tomorrow?’ but they may not be definitive.