This isn't like 2008—but a correction IS coming

Stocks are in uncharted territory with volatility spikes and drops in all of the major equity indices to start the New Year. It has been ugly, with $2.5 trillion in market capitalization being wiped out in the first four trading days of 2016, and may signal a dramatic rise in cross-asset volatility for the rest of 2016.

Why is this all happening? Plain and simple, the path to Federal Reserve monetary-policy normalization will be painful. With divergent monetary policy, there is less scope for suppression of market volatility. The Fed is beginning to tighten and drain liquidity from the markets, utilizing reverse repurchases to provide a soft floor under short-term interest rates.

A trader works on the floor of the New York Stock Exchange.
Getty Images
A trader works on the floor of the New York Stock Exchange.

The Fed said in its minutes that "even after the initial increase in the target range, the stance of policy would remain accommodative. Gradual adjustments in the federal-funds rate would also allow policy makers to assess how the economy was responding to increases in interest rates."

The statement suggests that the Fed will be data dependent and use current economic activity to determine the timing of the next rate increase.

One of the ancillary effects of this path to normalization is the effect on energy. Dollar strength has put pressure on all dollar-denominated asset classes including the most important geopolitical commodity: Crude.

Crude oil has remained below $40 and is now headed toward $30, which has not happened since 2008. The drop has been steep, but even more important is the velocity at which prices moved. WTI in recent trading broke through the lows from 2008 which immediately drew everyone's attention. Crude oil volatility will continue to affect equities in the U.S. and Europe. If China allows for faster currency depreciation than the financial markets expect, this will increase the downward pressure on crude.

Eventually, lower energy prices along with lower input costs for corporate America will be a tailwind for equities. But sovereign wealth funds that are from oil-producing states need to have oil much higher to meet their budgetary needs domestically. This market dynamic will drive the trajectory of global equities.

The level of sovereign wealth funds assets under management as of last week was at 7.2 trillion, with 4.4 trillion originating in commodity and oil-rich nations. With falling crude prices, the pressure on these sovereign wealth funds continues to mount. The need has arisen to repatriate the capital from sovereign wealth funds with spillover effects occurring for global equity markets. When markets move fast they leave no prisoners, it creates a global margin call; investors sell what they "can," not what they "want."

So what does this mean for the average investor? Be alert and defensive as the market corrects. One thing for sure is that we will continue to witness volatility in the capital markets for a prolonged period of time. A 20 percent to 30 percent correction in equity prices would be a healthy move after the recent run-up over the last few years. There will be continued earnings contraction in S&P 500 companies with a stronger U.S. dollar impacting manufacturers adversely.

The strong dollar will exacerbate lower prices for commodities in addition to crude oil. All of this will bring out the "doom and gloomers" including those who claim this is 2008 all over again. Wrong! Remember, bull market corrections are fast and vicious and it will look worst at the bottom. This is not 2008, it is a cyclical correction in a long term bull market. Be ready to put money to work as stocks go on sale throughout this year.

Commentary by Jack Bouroudjian, CEO of Index Futures Group LLC, a registered independent broker, and CIO of Index Capital Partners, a registered commodity-pool operator. He was also a three-term director of the Chicago Mercantile Exchange and founder and advisor of UCX (Universal Compute Exchange). Follow him on Twitter@JackBouroudjian.

For the latest commentary on markets in the U.S. and around the world, follow @CNBCopinion on Twitter.