Fear is fading, but is that good for stocks? - MarketWatch

Fear is fading, but is that good for stocks? - MarketWatch

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NEW YORK (MarketWatch) -- The Chicago Board Options Exchange's volatility index, otherwise known as the market's fear gauge, has slumped to levels unseen since before the collapse of Lehman Brothers.
"The rally is losing momentum, which is not terribly surprising," said Ken Tower, chief market strategist at Quantitative Analysis Service. "Is the VIX dangerously low? I would say it's close."
VIX 28.45, -1.79, -5.92%
On Tuesday, the VIX (VIX 28.45, -1.79, -5.92%) slumped 3% to 29.33, a level last seen in early September 2008, just days before Lehman Brothers shut down. The announcement had sent the VIX sharply higher, a move up that continued through December.
On the face of it, lower fear and volatility sound like a good thing. It means investors are more confident to take on risks.
What's normal?
The markets are strongly hinting that crisis conditions have ebbed. Barron's Mike Santoli comments.
But the spike in the VIX from September through December also set the stage for the massive relief rally that started in March. Now that fear levels are back to such low levels, the pulse of the market is tepid and stocks might be facing another leg down, analysts say.
"This might mean that we're eventually headed for a setback," Tower said. "I still see this as a stabilizing market in a stabilizing economy, but [the market] has come a long way very quickly."
According to FactSet Research, the VIX spiked to record highs of between 81 and 96 in late October, as panic gripped markets worldwide. From 2003 to July 2007, readings below 20 were the norm.