Absent any new “news” – like news of a preemptive rate cut – the market will likely gap down to reflect the futures trading. Two things to remember: (1) Every hedge fund of any importance trades in the global markets, so most U.S. hedge funds are already trading the Dow futures in the foreign markets that are open right now; the current Dow futures price already reflects what the marginal U.S. stock trader thinks is going to happen tomorrow; (2) There’s arbitrage at work here. If the Dow futures are trading at “X-5” and the actual Dow Index is trading at “X” the arbs are going to sell the actual Dow Index (with the higher value) and buy the Dow index futures (with the lower value) to capture a risk-free profit. But the market participants already know traders will try to do this at the opening and the current price reflects that – there won’t be a free lunch for anyone. Therefore, absent any new news, the market will likely gap down. Where it closes, who knows?
