In the past couple of months the bulls have staged a nice rally off the lows in the stock market and the volatility has been rather low. The wind behind the back of the rally has mainly been a slightly less discouraging economic outlook than was previously given, though it is still quite gloomy. Now that the market in many cases is up at least 20% from its lows the bar will be raised and the volatility is likely to come back in a big way.

The average investor needs to be very careful to not fall into the trap of assuming that the lower volatility and calm days of the last two or three months have now become the norm. They were the norm for that period of time, but I believe volatility and a real fight between the bears and the bulls will lead to many more choppy sessions in the months ahead. Even if you take away the current state of the market and the economy, the period we are entering is generally one that is quite a bit more volatile. As the summer months come and go and then traders return in a big way in September and October we usually see the most volatile time of the year.

The VIX, a guide to the volatility in the overall market and the amount of fear in the market,  has slowly moved down to about $30 per share in the last few weeks. I think it’s a safe bet that the VIX will see higher levels in the months ahead as investors try to digest economic news and determine whether things really are getting better or not. As I have stated in the past, it is now becoming clear that less bad will no longer be good enough for the stock market. The nation’s economy is still in a big mess and until that completely resolves itself one would be ignorant to assume that volatility will remained subdued.