Unexpectedly Intriguing!
April 13, 2015

We have two primary sources for dividend futures data for the S&P 500: the CBOE's four quarterly dividend futures options contracts (DVMR, DVJN, DVST, DVDE) that are set to expire in the months that mark the end of each calendar quarter, whose values are based on active market trading, and IndexArb's bottoms-up estimation of the dividends per share that will be paid out between the date that a given quarter's dividend futures contract will expire and the present.

That's two very different methods for estimating what dividends per share will be in the future. Which method do you suppose is better in explaining the general trajectory of current day stock prices?

To get an idea, we looked at the expectations that both sources of dividend futures data have indicated for the future fourth quarter of 2015 (2015-Q4) on each day since they became active in late December 2014.

CBOE vs IndexArb Dividend Futures for 2015-Q4, 22 December 2014 through 10 April 2015

And here's the actual trajectory of stock prices over the same interval of time from 22 December 2014 through 10 April 2015:

S&P 500 Index Value at Daily Market Close, 22 December 2014 through 10 April 2015

Upon inspection, there's little question that stock prices more closely mirror IndexArb's bottoms-up approach to projecting the expectations of future cash dividends per share.

Unfortunately, IndexArb's dividend futures data has a drawback. Because it counts down the total amount of dividends expected to be paid between the present and the end of the options contract period for a given future quarter, we cannot use its data for the current quarter. And that's a problem for us today because it would appear that investors have once again turned their attention to the current quarter in setting today's stock prices:

S&P 500 Alternative Futures - 2015-Q2 - Standard Model - Snapshot on 10 April 2015

Curiously, the reason investors are now focusing on 2015-Q2 would appear to have changed from what it was just a month ago. Before, investors would focus their attention and set their investing decisions based on their expectations for 2015-Q2 because they expected that the U.S. economy was performing well enough that the U.S. Federal Reserve would act to begin hiking the short term interest rates that it controls before the end of the quarter.

Today, after the disappointing March 2015 employment situation report, the rationale for investors for focusing on this quarter has changed. Instead of the potential for a rate hike occurring before the end of the quarter, they would instead appear to be looking for the Federal Reserve to clarify its intentions for future rate hikes in the very near future, where the choice is now between the late third or fourth quarter of 2015 and an as yet unquantified quarter in the second half of 2016.

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