If you’re like me, one of the first things you do when you wake up in the morning is turn on the television to check the stock futures. If so, you’ve probably also noticed that the morning futures quote not only provides little indication of how the market ultimately will do that day, but it also can be an ineffective guide of how stocks will perform even in the first hour.

Why the Discrepancy Between Futures and Performance?

The best answer to this question is one written under the name of the late Mark Haines, the former host of CNBC’s Squawk Box:

“First, the predictive value of the spread is very certain, but also very short-lived. In the morning, the effect is gone within the first few minutes of trading. The spread can tell you which direction the market will go AT THE OPEN, but once trading starts, things change quickly. Its primary value for the average investor is probably in the area of “market on open” orders. People who instruct their brokers to buy or sell when the market opens should be aware of how the open is likely to go.”

The “spread” mentioned here is the difference between the spot futures price and the fair value, which in itself can be a cause for confusion.

In many places — typically news outlets not dedicated to market coverage, such as CNN — the quote provided in the morning is the spot futures price. In others, including CNBC, the number on the screen is the fair value price, which incorporates interest rates, dividends and the time until the expiration of the front month contract. The latter is the more accurate measure of the two — be sure you know what number you’re looking at.

Mind the Gap

The frequent divergence from the futures indication and actual market performance raises the question of whether the data is useful for traders. The answer is that it can be, but not necessarily from the perspective of predicting a day’s market movement. Instead, the futures can help provide a gauge of sentiment when viewed over a period of several days or weeks.

One of the best indicators of a strong market is when the indices consistently close higher than the futures price that you see quoted throughout the night and into the morning — demonstrating greater buying interest among mutual funds and institutional investors than those plying their trade in the futures pits. Conversely, the opposite typically will be the case in a weak market.

This is consistent with the old saw that robust market performance in the final hour is a sign of conviction, while weakness into the close is a sign of underlying fear.

It therefore pays to keep an eye on the gap between the overnight futures market and stocks’ actual performance during the day. This divergence often can tell a different story about sentiment than can be gleaned by simply watching the indices’ headline returns.

The Bottom Line

Index futures certainly can provide a preview of major moves following a key overnight news event, but in general they aren’t much of a help for individual investors. The best bet? Do what the smart money does: Wait for “amateur hour” to pass, then look for opportunities to capitalize on counter-trend trades in the big movers from the first hour of trading.

Over time, this will be a better path to profits than reacting to the futures — and the breathless TV commentary that often accompanies them.