Looking to the Futures

Most futures traders are familiar with the large-cap S&P 500 index (SPX) and the associated E-Mini futures contract (/ES) plus the tech-focused NASDAQ-100 index (NDX) and futures contract (/NQ). Many also know about the small-cap Russell 2000 index (RUT) and the futures linked to it (/RTY). Plus, your local nightly news probably uses the Dow Jones Industrial Average ($DJI, futures contract /YM) to report on the stock market. There is another little-discussed domestic stock index with tradeable futures: the S&P MidCap 400 ($SP400). The associated futures contract (/EMD) has a 100x multiplier and follows the same expiration schedule as the other domestic index futures.

The expiration schedule isn't the only thing the futures contract has in common with its more well-known companions; margin requirements are roughly in line as a percentage of the contract's nominal value. Using current quotes and margin requirements for taxable accounts, the E-mini S&P MidCap 400 contract requires initial margin equal to approximately 8.4% of the nominal value of the contract. The S&P 500 E-mini requires 8.6%, with the Dow at 7.2% and the NASDAQ at 9.8%. The Russell 2000 has a slightly higher requirement at 10.7%. An important difference to consider with /EMD futures versus the others is that there are no options associated with the contract.

While the margin requirements are similar to the other domestic index futures, there is a big discrepancy in volume on the contract versus its peers. While the 50-day average volumes for the others are over 100,000, the MidCap contract averages around 6,000 contracts traded per day. Granted, that's a big difference, but the volume is still in line with well-known contracts on commodities like palladium (/PA) and lean hogs (/HE) and exceeds the average volume for feeder cattle futures (/GF).

The index is composed of the middle 400 stocks by market cap of the S&P Composite 1500 ($SP1500) index. As the names may imply, the largest 500 stocks in the S&P Composite 1500 make up the S&P 500. The smallest 600 companies constitute the S&P SmallCap 600 ($SP600). For the MidCap 400, the three largest sectors by weight are industrials (20.9%), financials (18.8%) and consumer discretionary (13.3%), which combine for over 50% of the index. The sector weights are somewhat similar to those of the Russell 2000, which includes industrials (19.22%), healthcare (17.73%) and financials (17.11%) as the top three sectors. An interesting facet of the Russell 2000 is the concentration in regional banks, which make up more than 10% of the names in the index. In contrast, the S&P 500 has nearly a third of its assets in information technology, with Amazon (AMZN) and Alphabet (GOOGL and GOOG) making up another 9%.

An important difference between the MidCap 400 and the Russell 2000 is the index methodology. Initial inclusion in the S&P 1500, which includes the MidCap 400 and the S&P 500, requires positive earnings in the most recent quarter and the sum of the most recent four quarters. The Russell 2000 has no such rule for profitability. Note that the profitability filter only applies to joining an index, not staying in the index. That does have downstream effects however; around one third of Russell 2000 companies were unprofitable over their most recent fiscal year, while 10% of the S&P 400 and 5% of the S&P 500 had negative earnings.

For the year, the contract has outperformed the other stock index futures, gaining 6.9%. It is followed by /RTY up 4.9%, with the Dow, NASDAQ-100 and S&P 500 all down for the year. The index has a long-term correlation of 86% to the S&P 500 and 94% to the Russell 2000. The yields are similar across the market cap indexes, coming in between 1.0 and 1.2%.

The contract has recently crossed the 9- and 20-day SMAs several times over the past ten trading days. The MACD is weakening and has been negative since last week. The 14-day RSI is near the midline and has only crossed into overbought territory once in the past six months. The sharp selloff yesterday could present the right shoulder of a head-and-shoulders pattern, indicating further potential downside.

ADP Employment Change 8:15 AM ET

EIA Crude Oil Inventories 10:30 AM ET

ISM Non-Manufacturing Index 10:00 AM ET

MBA Mortgage Applications Index 7:00 AM ET

S&P Global U.S. Services PMI - Final 9:45 AM ET

New futures products are available to trade with a futures-approved account on all thinkorswim platforms: 

• Ripple (/XRP)
• Micro Ripple (/MXP)
• 100 OZ Silver (/SIC)
• 1 OZ Gold (/1OZ)
• Solana (/SOL)
• Micro Solana (/MSL)

Visit the Schwab.com Futures Markets page to explore the wide variety of futures contracts available for trading through Charles Schwab Futures and Forex LLC.