Booyah Breakdown: Looking Into the Futures

So if the stocks had a good trading day abroad, the S&P 500 futures contracts will probably be up. That would generally mean our markets will open higher than they closed at 4 p.m. EDT the day before. Granted, it's no guarantee that the market is going to keep going higher; it's simply an indicator of how the day is going to start.

And look out for the "fair value" comparison. This shows the relationship between the S&P 500 futures contract and the actual value of the S&P 500. If the S&P 500 futures are above the fair value, folks are betting the index will go higher. The opposite is true if futures are below fair value.

The Future of Everything Else

"Watching the futures market in the commodities world is jut as important, because many stocks reflect underlying trend in commodities price," says Jake Bernstein, Realmoney.com contributor and author of How the Futures Markets Work.

For instance, the recent jump in Phelps Dodge's (PD) stock at the end of July was primarily because of the underlying upward move in copper. Gold moved up, and so did Barrick Gold (ABX). And the recent bull market in corn and crude oil helped increase Archer Daniels Midland's (ADM) stock, notes Bernstein, to name a few examples.

Thus, if your company uses a commodity -- such as wheat, cotton or lumber -- pay attention to those markets. Because there are lots of geopolitical factors that affect commodities pricing and, therefore, your stock.

For instance, with all the recent talk about ethanol (which comes from corn) as a substitute for gasoline, corn prices could continue to climb. And that won't bode well for a company like Kellogg (K) that buys loads of corn to make our favorite breakfast cereals, notes Fredericks.

Of course, Kellogg could be buying futures contracts on corn and locking in today's prices.

So get familiar with the futures market. Troll around the Web sites of the CME, the Nymex and the Chicago Board of Trade and get a feel for what's hot, what's not and what's new.

Granted, understanding the futures market is not going to get you winning lottery numbers, but it will help you make smarter investment decisions.

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