Index futures - real or nominal value charting?

Good morning traders and investors:


Today I'm going to look at something a little specific, but don't let that stop you from reading, because it will be food for thought for those of you that trade index futures.


When you open up your SPX futures in the morning (or at 14:30 in the afternoon if like me you're in the UK), do you ever stop to think about the impact of the nominal figures that you're trading against the real figures of the S&P500 (using a CPI inflation rate).


Now, whilst I appreciate that you can't actually trade SPX in real terms (iShares are yet to offer us an ETF that exposes you to real rated indexes), we can use it in comparison to the nominal value of the SPX to illustrate a true down trend (and therefore increase in value available to investors).


For example, let's take the SPX as of the close on July 18th 2014 (yesterday):


1. We had a new nominal record close for the S&P500 of 1978.22

2. The equivalent record close for the S&P500 in real terms however would be just under 7% higher than it currently is in nominal terms.


That's great, but what does this actually mean?


Well, for those who are prepared to do some data trawling, you can uncover some pretty useful trends when comparing the real and nominal index values:


1. A nominal upwards drift combined with a real down trend tends to result in a increase in equity value or a fall and consolidation in trailing P/E ratios. For example, 1966-1982 saw this trend in the SPX and by the end of the trend you could get a trailing PE of 6.6


2. You need to be very careful when buying into the stock market. Yes, this is stating the blatant obvious, but if you have bought into the SPX on in the secular bear market of 1966-1982 you could have gained almost 9% nominally and lost almost 65% in real terms.


I hope this is food for though for some of you,


The Masked AIM Trader