E-Mini S&P500 Futures Volatility Forecast (21/06/2011)

The last week we were bullish E-Mini S&P500 futures but bad macroeconomics news changed the scenario and dragged the American index back down again. Specifically, the market opened at 1.271 on Monday, it rose to 1.289 on Tuesday but it then dropped to 1.265 on Wednesday and moved practically sideways for 2 days since that 1.269 and 1.265 have been the registered closing prices on Thursday and Friday respectively.

The volatility is now at 1.43% (22.6% in annual terms) and it is evident that the current level of the volatility curve, displayed in the TGARCH plot, is the highest point achieved by the conditional variance over the last 5 months.

However, the fact that the volatility curve is now so steep and the fact that the actual condition of the oscillation rate is probably unsustainable, even in the short term, are signalling quite evidently that the mean reverting process is on its way.

As we mentioned in our previous analysis the return of the volatility towards its balance level, which is around 0.6% (9.5% in annual terms), is going to be slow but constant at the beginning of the move but it will become fast and violent as the variance approaches the above mentioned level.

Thy HyperVolatility team is bullish E-Mini S&P500 futures because the decrease in the conditional variance is going to favour a recovery of the price which should retest the 1,290 – 1, 295 area by Friday, news permitting.

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