The market’s 'fear gauge' may be signaling investors aren't buying the rally

A concerning disconnect may be emerging between equities and the market's measure of volatility, according to one portfolio manager.

Dennis Davitt of Harvest Volatility Management told CNBC's "Trading Nation" he's carefully watching the Cboe Volatility Index, widely considered the market's "fear gauge" as it measures equities' expected volatility over 30 days. Here are his reasons why.

• Stocks kicked off the week in rally mode across the board, with the Dow surging triple digits and going positive for the year, and the S&P 500 surging nearly 1 percent.

• Despite the market's strong showing, Cboe's VIX didn't decline as much as investors might expect; it was briefly positive on the session, falling a bit more than 1 percent by the market's close. This signaled market participants may not be buying into the market's rebound from recent lows.

• The lack of a major decline in the VIX during the rally, which is uncharacteristic, likely has much to do with global trade. If trade-related issues are not resolved with China, the market may very well pull back. At the moment, there's still uncertainty in the market that may not be fully reflected in the VIX.

• In the sessions to come, Davitt will be closely watching how the VIX moves in a rising market. If it fails to pull back meaningfully, this would be a bearish signal.

Bottom line: The market's gauge of volatility isn't falling as much as it typically would as stocks rally, which could be concerning for stocks, according to Davitt.

Vote
Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect