The SPI premium is a reference to the difference between the SPI...

The SPI premium is a reference to the difference between the SPI closing price and the XJO closing price for the day. A few of us watch it as it can give an idea of market sentiment.

Volt often describes SPI traders as "getting it wrong" and he is referring to the SPI often having a premium in a bear run or vice versa (having a discount in a bull run). A change in discount/premium usually signals a longer term trend change.

XJOers have varying opinions on why all this happens but the result seems pretty consistent. My thoughts on this phenomenon are based on current hedging of the "bigger end of town". For example, if I was a large super fund and long a bunch of blue chip stocks, I would hedge using a spi short. During a bull run, selling SPI to hedge stock positions would in theory keep the spi at a discount to XJO. Of course the reverse scenario should be true too and in times of small differences between SPI and XJO suggests lack of conviction in either direction.

Volt also has an "outlier" theory that involves a large single day premium or discount that suggests a low risk entry for the opposite direction over the short term.