Futures spreads

One thing that is fantastic about derivatives is the ability to bet on just about any aspect of the future, so long as there is someone willing to bet against you. The end result of this is that you can get odds on many things, and a consensus bias on many more.

On the way down, the futures spread on the ASX 200 index (both March and June) were around 1% below the index, indicating a consensus of "falling". At the bottom it flipped around, with a spread of 0.5% above the market (June only - March had expired), indicating a consensus of rising, something I bet against to my great detriment. In the last week, the June contract has slipped to between 0.1-0.2% above the market, indicating an expectation of a very mildly upward drifting market until June, however the September contract is trading 1% below the index. After September, the bets get less precise, but imply no recovery even through to June 2010.

To complicate this further, there is an activity called arbitrage. A big player could make bets against all stocks now and buy futures for a guaranteed profit, which will move the market down and the futures up. I believe this results in around 1% being the maximum possible difference between futures and the market while the market is open - otherwise financial institutions with nifty maths and powerful programs will step in and take free money.

In summary, the futures market is predicting a massive market fall between June and September. Bet against it at your own risk.