Q&A

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Since You Asked

Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions.

Don Bright of Bright Trading

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NOT SUPER-FANCY

Maybe Don or somebody else can tell me how to calculate S&P futures. I remember back in the early 1990s, one guy at the quote terminal would calculate it by having a Standard & Poor's 500 call and put option quote with the S&P 500 indicator. Somehow, you would subtract the price difference of one or both contracts and come up with a number (if it was less than 10, the market was discount, and if it was greater than 10, it was at premium) that would indicate an imminent sell or buy. It worked very well. Not only that, I want to get a real-time tick.

I used to have this on my DBC/QuoTrek machine in the early to mid-1990s and it was a great buy/sell indicator when it went -900 or +600.

I'm not super-fancy and don't have the systems most of you guys have. If you know how I can get a real-time tick, send me a holler. Thanks. -- DSQ

Not sure what you're asking. We don't calculate S&P futures; they are what they are -- current trading prices. But to determine premium or discount to fair value (in order to read market movements), we simply take the spot price (SPX) and add fair value (FV) (check www.stocktrading.com/Trading info.htm for daily FV). This will result in x. Then check to see if the current emini ESx8 is trading (insert front month for x), and see if you have a positive differential (PREM) or a negative differential (DISC). We use this same computation to determine pricing of our opening-only orders (check STOCKS & COMMODITIES' archives for my "Opening orders" Q&A). We don't need to check the option prices.

Regarding real-time tick charts, several options are available. I provide all of our traders with a spreadsheet that automatically keeps track of PREM and DISC via a dynamic data link to our RediPlus platform (www.redi.com). We can always use the actual Redi tick chart as well.

You are also making reference to NYSE tick, which is simply the net of all the upticks and downticks on exchange-traded stocks. And yes, we look for directional reversals near the 900 level, positive or negative.

In our office, we also use the real-time Track Data service, which offers excellent tick charts. I also keep a 10-minute chart of the SPOOS up to see the overall daily movement/trend.

I'm not super-fancy, either. All of the above keeps things simple.

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REPRICING MUTUAL FUNDS

Since mutual funds only reprice at the close of trading, can the mutual fund managers see the reallocation requests heading their way throughout the day? On one hand, you would think they should be able to see it so they can hedge their portfolios. On the other hand, you would think if they did see them coming, it could be construed as some sort of insider trading. Either way, how do they deal with the unpredictable flow of money and keep their positions in check? --Tom

Mutual fund managers and other portfolio managers receive buying and selling requests pretty much every day. The net asset value (NAV) is computed each day. This NAV is basically a liquidation value for someone who wants to sell their shares in the fund. There is a much higher offer for those buying into the fund. This difference reflects commissions and other costs involved.

The reallocation requests you are referring to are made internally and, depending on the specific investment objectives and fund type, stocks and exchange traded funds (ETFs) will be bought and sold to maintain the proper overall portfolio balance. Basic examples are S&P funds, global funds, growth, or value funds. The management team is responsible for keeping these objectives in mind on a daily basis, although they tend to be more concerned at the end of the quarter when financials are issued. This is where the term "window dressing" comes into play. Funds will often buy or add to the stocks that have performed well, and sell off the poor performers.

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KNEE-JERK DEFINITION

Hello, you used to mention the following: "It's sort of like the FOMC meeting days when futures traders have bids at 1135 and offers at 1145 (when futures are trading at 1140) -- hoping to get filled on the ‘knee jerk.'" Does this mean the trader can get filled at 1145 or 1135 and then just buy or sell at 1140? What is "knee jerk"? And does such a thing still happen? --daytrader06

There is generally a quick reaction to the initial news coming out from the FOMC (Federal Open Market Committee) meetings. Rate cuts, increases, or no action at all seem to cause immediate knee-jerk reactions prior to a more in-depth analysis of what is actually being done, and how it should affect the markets. With additional comments being made for the next few minutes, you're likely to see big swings in futures prices. Many traders "ladder" sells and buys, up and down from current trading prices to capture these swings.

If you chart out the futures prices on the 2007 Federal Reserve days, between 2:14 and 2:30 or so, you'll see some pretty wild swings. Our traders love Fed days. And, yes, the volatility should continue in 2008. Love Fed chairman Ben Bernanke or hate him, you gotta like Fed day!

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E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."

Originally published in the April 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.

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