'Bipolar' markets lose the fear; are they ready to relax?

The market's jitters took a nosedive late last week, despite more worrying headlines. The fear factor is abating, but it still doesn't mean the wild roller coaster ride is over yet.

"We have already had a few years with volatility being very subdued, and thus we have been due for some normalized market movement," said Brian Stutland of Equity Armor Investments. "In a sense, we are back to normal."

After the panicky highs the CBOE Volatility Index hit on Oct. 15, that measure of expected market moves (which largely measures the expected likelihood of a major decline) has plunged 46 percent. Indeed, as the S&P 500 has bounced back from its lows, the market's fear gauge dropped nearly 25 percent in the last week alone.

Read More Stocks snap back on good earnings, strong economy

"We did see a rapid rise, but what's more unusual is how quickly the VIX collapsed," said Tim Edwards, director of index investment strategy at S&P Dow Jones Indices. "Normally it spikes up and grinds down, so it is genuinely unusual how quickly it's decayed."

The VIX is still well above multiyear lows hit in June, yet many analysts say much of the volatility has been drained from the market. As a result, the VIX's plunge suggests the panic is largely gone.

"We're back in the 'no fear' zone, which is fine, because last week was the 'no fun' zone for investors," Scott Nations told CNBC. "With the S&P once again well above the 200-day moving average, and with solid earnings from everyone except Amazon, the market is signaling the all-clear."

Read More Gartman admits getting 'bear market' call totally wrong

Traders on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders on the floor of the New York Stock Exchange.

Nations, whose firm runs an index that gauges expectations of extreme price moves, notes "the cost of insuring against a massive move down, a 'tail event' that would be a drop of more than three standard deviations, is down 60 percent from its high earlier this month."

Tony Dwyer, the famously bullish chief equity strategist at Canaccord Genuity, said the market's path clearly points higher—even after stocks have quickly soared in what feels like a sigh of relief.

"That was the nasty correction, but what the rebound shows is that's just what it was: a correction," he told CNBC. "I would expect a bit of profit-taking, but earnings are good, market fundamentals are good, credit's okay, and we're pretty bullish into the end of the year."

After a massive week for earnings, America's corporate report card is indeed coming in nicely. Out of the 205 S&P 500 companies that have reported, 70 percent of the third-quarter earnings have come in above estimates, and 59 percent have beaten on the revenue side, according to Thomson Reuters.

Perhaps most crucially, Caterpillar crushed earnings estimates and boosted guidance, assuaging concerns of what a tough global economic picture means for U.S. corporations.

Read MoreCaterpillar blows doors off analyst estimates

Of course, not everyone is so sanguine about the rest of the year.

"Short-term, we think this is a bipolar market," said trader Jeff Kilburg. "We do expect to see a pullback next week, as these markets continue to be like scissors."

For Equity Armor's Stutland, wherever the market trades over the next couple of months, buying options rather than the stocks themselves (which should drive the VIX higher, given that the index measures the prices of S&P 500 options) will become the more salient strategy.

"With the move down and back up in these last two weeks, traders are going to want to own calls or puts to make directional bets, rather than buying or selling the underlying," he said.

Stutland added: "to me, the rise in volatility is not due to fear over the economy. There's simply been a realization that volatility should trade at more normal levels."

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