Market disconnect: ES & SPY

[JackRab]

No need to get overly technical. or anal.

but the SPY/SPX/DOW/ES are all essentially the same thing,
They all move in sync, and represent 'The Market.'

Wut?

SPY and SPX and DOW are the same thing?

I'm now actively thinking of hitting my head on my desk...

SPY is an ETF, which tracks the SP500 index
SPX is the SP500 index, calculated by CBOE, also has futures traded on it (SPX futures which are SP500 full)
ES is the SP500 index, calculated by GLOBEX, also has futures traded on it (ES futures, which are SP500 mini's)
DOW is a different index... the Dow Jones Industrial Index. Futures on it are YM, which are minis.

The only ones that move in sync are ES and SPX, the futures on both track each other very closely.

SPY is an ETF... which is traded differently, should track the SP500 stocks in the same configuration as the index. Big difference is dividend payouts, which are at different times than the actual stocks in the index.

- Index levels are total of all components in that index, based on their correct weighting.
- Futures trade roughly at levels of the Index + Interest -/- expected dividends up until the expiry of the futures.
- SPY... just tracks the index closely and pays out dividend quarterly I think. There's probably some adjustment factor as well, depending on whatever it depends on... read the prospectus.

 

[vanzandt]

How the hell is SPY closer to the real SP500 index level that the actual SP500 index level?

The stuff I read on ET is sometimes astonishing...

 

[Sig]

I think the most interesting question - has there been any backtesting as to, when futures and spot diverge, which is typically "right" - i.e. does more often than not futures pull back more towards spot or spot more towards futures?

You have a huge misperception of how futures are priced. The difference between any index future and spot can be 100% explained by the dividends and interest rate. There is no "guessing" that prices will be higher or lower in the future that causes futures to diverge from spot, if there was it would be arbitraged away in microseconds. And yes, there have been literally hundreds of academic papers and textbooks written on this subject, highly recommend reading at least one, maybe two or three. A Finance 101 MOOC would also be a great (free) investment, for several people on this thread!

 

[JackRab]

And yes, there have been literally hundreds of academic papers and textbooks written on this subject, highly recommend reading at least one, maybe two or three. A Finance 101 MOOC would also be a great (free) investment, for several people on this thread!

I think there have been literally hundreds of comments in ET threads about this as well...

I don't understand why people are trading futures and derivatives and volatility derivatives if they don't even get the basics of how the pricing works... it's mind blowing to me that people are just putting their money on the table without knowing that.

 

[Sig]

I think there have been literally hundreds of comments in ET threads about this as well...

I don't understand why people are trading futures and derivatives and volatility derivatives if they don't even get the basics of how the pricing works... it's mind blowing to me that people are just putting their money on the table without knowing that.

And yet I still feel stupid because I haven't figured out a way to reliably make money off their ignorance yet. It's my holy grail, them and the ultra partisan and fundamentalists, that kind of willfull ignorance has to be exploitable!