NEW YORK (CNN/Money) - The days of the day trading fad may be over, but investors, looking to catch some quick action in the minutes or seconds after the stock market opens, still rely on an indicator that gained popularity back when Wall Street was a one-way bull run -- fair value.

Simply put, the fair value quote reflects the relationship between stock index futures and the index's current levels. It is a theoretical estimate of where the futures should be trading based on their underlying cash index and with things like short-term interest rates and dividends factored into the calculation.

If fair value is up in the pre-market hours, it usually means the stock market will open higher. Conversely, if it's down, the market is expected to decline.

"It's an important part of the puzzle for those following the markets on a real-time basis," said Andre Archambault, research director and fair value strategist with Standard & Poor's. "It tells you what the dynamics at play are in the markets. But it's just a very short-term determinant."

Understanding fair value begins with getting a handle on the relationship between a futures contract -- in this case the S&P 500 futures contract -- and the underlying commodity that the contract's value is derived from. In this case, that's the S&P 500 index of large company stocks like Microsoft (MSFT: Research, Estimates), General Electric (GE: Research, Estimates) and Merrill Lynch (MER: Research, Estimates).

Buying or selling a futures contract is a bet on the future direction of the underlying commodity. The S&P 500 contract, launched in 1982, trades on the Chicago Mercantile Exchange, the same market where traders bet on the future prices of commodities like pork bellies, grain and interest rates.

An agreement to buy or sell the S&P futures amounts to a bet on how the index of stocks will behave over time. Like any financial security, its value changes from moment to moment based on what traders are willing to pay for it. The contracts expire in March, June, September and December. The most active trading is done in the contract with the nearest expiration date, or the "front month."

Because the contracts are settled at a future date, their price generally is higher than the current index price on expectations that stock prices tend to rise over time. But this relationship, and how fair value is calculated every day, is much more complex.

Here's why: the theoretical cost of owning all 500 stocks in the S&P 500 index will always be different than the cost of owning an S&P futures contract, which has no cost beyond its face value.

This difference comes from two factors. First, if you bought all of the stocks in the S&P 500 index, you'd have to fully finance the purchase -- a huge undertaking -- or borrow the money at the current interest rate.

Second, if you owned stocks in the index, you'd receive dividends. Because they are not shareholders in the companies of the underlying index, owners of a futures contract on the S&P 500 receive no dividends.

So determining the fair value relationship between the S&P 500 futures contract and the underlying S&P 500 index requires adding the cost of borrowing the money to buy the S&P 500 stocks, while subtracting the gain these stocks pay in dividends.

Generally, the price of the futures trades at a premium to the price of the stock index. If the futures are trading below the stock index, they are considered to be at a "discount." The difference between the value of the futures contract and the underlying stock index is called the "spread."

Trading desks at major investment firms calculate fair value daily after the market closes. If they say, for example that fair value is "plus 10," the futures contract needs to be 10 points above the cash index's close the previous day in order to be at its fair value. S&P futures trade nearly 24 hours a day. So, if before the stock market opens futures are trading above their fair value in relationship to where the S&P 500 closed the previous day, stocks are likely to open higher.

Consider a real-time example: on June 3, the S&P 500 index closed at 1040.68. S&P 500 futures closed lower at 1038.80. Fair value for the futures, according to those who calculate it, was 1041.45, or plus 2.65.

On the morning of June 4, the futures ended their overnight trading session at 1038.00. (This session ends at 9:15 a.m. ET, 15 minutes before the stock market opens.) That's 3.41 points below their fair value in relationship to cash.

So market forecasters called for the stock market to open lower. Sure enough, at 9:40 a.m. the S&P 500 index was 2.05 points lower at 1035.95.

Currently, one point above or below fair value equals a 9.3 point-change on the Dow Jones industrial average as trading begins. This 9-to-1 relationship reflects the ratio between the value of the S&P 500 index and the Dow.

Many market technicians believe fair value doesn't have much relevance for the individual investors with an intermediate-to-long term investing objective -- the core audience of financial news networks.

To the average investor [fair value] is background noise. All that it indicates is the general trend of the markets for a very short time after the open. Barry Hyman Ehrenkrantz King Nussbaum

"The fair value indicator is important only to short-term traders and index arbitrageurs," said Barry Hyman, chief investment strategist with Ehrenkrantz King Nussbaum. "To the average investor it's background noise. All that it indicates is the general trend of the markets for a very short time after the open."

Sometimes that's not even the case. In the quarterly earnings period, it's the report from a big-name company or a string of companies, either the night before or in the morning before the opening bell, that can trigger weakness or strength in futures trading.

"The bottom line is that it's not something that investors should worry about at all. Fair value gives no indication for long-term investing whatsoever," said Ralph Acampora, chief technical analyst with Prudential Financial. "It might indicate how some traders might position themselves in the next few minutes after the open."

There is, however, a group of market participants, for whom fair value has a lot of relevance. These "arbitrage traders" closely follow the trend of futures contracts and any fluctuations above or below fair value.

During the trading day, when the S&P 500 index and the futures trade simultaneously, the S&P 500 futures contract usually moves in a fair-value relationship to the S&P 500 stock index. But occasionally, the S&P 500 futures contract may trade above or below what is perceived as its fair value

An arbitrageur will look to profit from the price difference -- called an arbitrage -- whenever the futures contract trades above or below fair value.

Here's an example: if futures trade above their fair value to the index, an arbitrageur will agree to sell the contract at a future date, believing that its price will fall. If it does indeed fall, the arbitrageur will profit by pocketing the difference between selling the higher-priced contract and buying the cheaper one.

And then there are the hedgers.

A money manager who owns stock in the S&P 500 companies, for example, might agree to sell the contract in the future. This way, if the price of his stock portfolio falls, the manager can guarantee the drop will be offset by the selling of the contract, neutralizing the loss.

If the portfolio strengthens, the money manager is also OK. He simply buys an offsetting contract, neutralizing the original futures position.