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Volatility is here to stay

Nicole Sinclair
Markets Correspondent

Fear is on the rise. The CBOE Volatility Index (^VIX) – sometimes called the “Fear Index” – spiked from 16 to the mid-20s over the past few days. And with the Fed expected to raise rates this week, it may only get worse, according to Mark Sebastian, founder of OptionPit.com, who joined Yahoo Finance from the CBOE in Chicago.
"Now when the VIX has that massive outperformance, that does not bode well for the S&P 500 (^GSPC)," Sebastian says. "What all this pressure on VIX has created is what's called 'backwardation'... When the VIX is in backwardation, the S&P has an extremely negative expectancy."

Backwardation is when later-dated futures contracts trade at prices lower than the nearer-dated ones.

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Sebastian says he sees the VIX staying in the 15 to 25 range for the time being while we figure out the effects of the Federal Reserve's actions over the next couple of months. "I don't think the Fed knows what's going to happen, I don't think the market knows what’s going to happen. That's increasing volatility," he says.

"When we see this kind of massive performance of the VIX, when you see the VIX in this backward mode, the cash over the futures, and so on and so on, that's a sign of extreme market stress. It's not going to act normal. All the assumptions that you make as an investor – fundamentals, technical analysis – when the VIX is backward, they go out the window. Don't even try to use them, and start recognizing the market is in an illogical period and navigating things [is] going to be far more difficult."

As for the impact of oil? Sebastian says we are starting to find a bottom in the price oil as there is not as big of a rush for traders to buy put options in West Texas Intermediate crude oil (CLF16.NYM).

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