VIX Index Volatility Forecast (05/10/2011)

The VIX index opened at 39% on Monday, dropped to 37.7 on Tuesday, climbed to 41 on Wednesday, plummeted to 38.8 on Thursday and closed to 42.9 on Friday.

The volatility is around the 7.8% – 8% level (26.6% – 27.7% monthly) and the TGARCH chart is now displaying a volatility curve which is primarily moving sideways even if it is still very close to the 4% (13.8% monthly) long term equilibrium point. The actual situation of the VIX is neither indicating panic nor greed but uncertainty and indecision because many investors are not really sure which way the price is going to head to. Additionally, most of the uncertainty has been caused by both European and American politicians who keep promising new and robust policies to tackle the crises but are not implementing them.

The HyperVolatility team is bearish the VIX index because the stochastic volatility of the S&P500 implied volatility index is not giving any signal of potential bursts. As a consequence, we believe that the high volatility levels at which the VIX is currently trading will not hold for long implying that we could have a closing around the 38% – 39% by Friday.

However, a further round of sell-offs would push the VIX even higher and given the panic surrounding financial markets readings around the 48% – 50% could be easily achieved.

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