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E-Mini S&P500 Futures Volatility Forecast (10/07/2011)

E-Mini S&P500 futures moved sideways for 3 days but the positive expectations about macroeconomics news pushed the price all the way up before the occurrence of the final collapse that we all saw on Friday. Particularly, the market opened at 1,333 rose to 1,336 on Tuesday, moved back to 1,335 on Wednesday, jumped to 1,352 on Thursday and plummeted to 1,341 on Friday.

The current volatility is 0.6% (9.5% in annual terms) and the TGARCH plot is clearly displaying a downward sloping curve which is about to end its mean reverting process. Specifically, the conditional variance is likely to settle around the 0.45% – 0.5% level (7.1% – 7.9% annualised) which is the long term equilibrium point for this market.

It is worth noting that the plunge in volatility has been primarily caused by a sideways movement of the price action whilst the last part of the curve shows that the big jump occurred on Thursday increased the variance but the consequent price drop did not produce any effect.

The HyperVolatility team remains bearish E-Mini S&P500 futures because the next trading days should see more fluctuations even if the price should move laterally in the first half of the week. In other words, the volatility is expected to mean revert and then rise back. In particular, we believe that the augment in the conditional variance should drag E-Mini S&P500 futures back down in the 1,325 – 1,330 area.

Nevertheless, if the volatility curve, after reaching the equilibrium point, remains low we will reconsider our analysis and look at the long side of the market but the bad job reports we saw on Friday, the Portuguese’s sovereign debt downgrading and the imminent default of Greece should keep investors’ greed down.

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