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.

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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.

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