×

Should we fear the fear index?

Chart technicals
Tetra Images | Getty Images

As the market keeps going higher and higher, Jim Cramer and the chart watchers are boggled. What the heck is going on with the CBOE Volatility Index, a.k.a. the VIX or fear index?

The VIX is the index that shows the fear for the market's expectation of 30-day volatility. The idea is that a low VIX is good news, because it indicates a low amount of fear of an inflammatory market.

So here is the issue: The volatility index is at historically low levels right now, at $12.25, and that's great…right? Maybe.

What is strange is that the S&P ended near record highs on Tuesday, yet the VIX is more than two points higher than where it was the last time the S&P was making new highs.

To find out what is going on, Cramer went off the charts with Mark Sebastian, technician and founder of OptionPit.com to find out why traders are less comfortable with this rally. Sebastian thinks it is a simple answer: U.S. markets have a lot of noise around them right now.

When Sebastian took a look at some of the specialized indices of the VIX, he sees that the volatility index is headed lower into the end of the year. This could suggest that the stock market has more room to run.

Why? Because of interest rates. Right now there is heavy speculation that the Federal Reserve will be raising interest rates in 2015.

"Sebastian says that just isn't going to happen, and when more people realize it won't happen, the market will rally. It's just a matter of time before our stock market figures it out," Cramer said.

Sebastian laid out four reasons why interest rates will not go higher, and they have all got the Cramer seal of approval:

First, when the Fed starts raising rates it will be because the U.S. economy is reaching full employment, and there is a risk of inflation. However, the U.S. dollar is at multiyear highs against the euro, which suggests there is a lack of inflation for the currency. Also if you take one look at the low price of corn futures, you will see it is at multiyear lows. Hence, Sebastian pointed out that inflation is not an issue right now.

Second, yes unemployment rate is below 6 percent. However, the U-6 employment rate is showing a huge disparity. The U-6 rate includes marginally attached workers – those are people who aren't actively looking for work but still want a job, as well as people who are looking for full-time work but had to settle for a part-time job. So while the top-line unemployment is at 5.8 percent, the U-6 rate is at 11.5 percent. Yikes! That's a huge spread.

This is important because the Fed cares about wage inflation, and that has been stagnant and the charts show it will continue to be. This is bad news for most Americans hoping for a raise, but good news for the market- as it means the Fed won't raise rates any time soon.

"That is why Sebastian thinks it is pretty unlikely that the Fed will raise rates in 2015, and it certainly won't happen in the first or second quarter," the "Mad Money" host said.

----------------------------------------------------------
Read more from Mad Money with Jim Cramer
Jim's tribute to his Pop, Ken Cramer
Cramer Remix: Warning about Friday's rally
Cramer: Boats, bikes and snowmobiles, baby!
----------------------------------------------------------

Sebastian added that he sees the VIX trading down to 11, maybe even 10, and that the S&P 500 will break out above 2,100.

Both Cramer and Sebastian think there is no reason to worry that the Fed will raise rates, and investors can buy buy buy into the New Year.

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer's world? Hit him up!
Mad Money Twitter - Jim Cramer Twitter - Facebook - Instagram - Vine

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com