Globex S&P Fair Value Program

By: Laurence A. Connors and Blake E. Hayward

The following is an excerpt from Investment Secrets of a Hedge Fund Manager

This is one of our most consistent trading methods.  This program combines the inefficient pricing of the S&P market caused by M.O.C. (Market On Close) orders with Globex trading.

Here's how it works:

  1. Each day you need to find out what the fair value difference of the S&P futures is to the S&P cash market.  This information can be obtained from your broker, CNBC, or possibly your computer program.
  1. At 4:30 P.M. (EST), take the closing cash value of the S&P 500 cash market and add the fair value to the cash number.  The reason you wait until 4:30 is because it takes a few minutes for market on close orders to be computed.
  1. Add an additional .50 points to the number derived in step 2.
  1. Place a sell stop on the S&P 500 futures at the price obtained from step 3.
  1. If filled, cover your short at fair value (your fill minus 50 points) during Globex trading.  You have over 16 hours to get filled.
  1. Make sure you do not carry the position into economic news the next morning at 8:30 A.M. (EST).  Close the position before the news!  Remember this is a scalping method and one economic report will wipe out many weeks of profits.

A note to the above rules.  If at 4:03 (EST) the S&P futures market is trading at a substantial amount over fair value plus .50, it means the market is strong.  You may be able to get a higher fill selling M.O.C.

Example:

Step 1:  On Friday, October 14, 1994, the fair value for the S&P 500 futures market was 1.42 points above the cash market.

Step 2:  At 4:03 P.M. (EST), the cash market settled at 469.10. 469.10.  Add 1.42 to 469.10, which gives us a fair value number of 470.52, which we round off to 470.50.

Step 3:  Adding .50 points to 470.50 gives us 471.00

Step 4:  A sell order is placed at 471.00 for the remaining few minutes of trading.  We are filled at 471.00 a few minutes later, and the market closed at 471.25.  (Sometimes we sell at the top; in this case the market kept going).

Step 5:  On Sunday evening, we place a buy order at fair value (470.50).  The market opens 471.00 and proceeds to sell off, giving us our fill at 470.50 for a 50-point profit (the market eventually reached a low of 469.60).

We do not trade this method from the long side.  We would much rather be short the market in the evening.  We believe market traders fear the worst overnight and would prefer to buy the market the next day when any and all news can be properly assimilated.  That is why when the market trades above fair value it has an overwhelming tendency to correct itself on the Globex market.  This method has worked extremely well during a period that we would classify as a bull market (1993-1994).  We feel it will be even more profitable during a bear market.