After the USA election, the stock market has recently surged, and Wall Street's fear index has similarly declined, as investors observe market volatility to find clues on whether the rebound can be sustained.

FactSet data shows that the cboe volatility index fell 1.7% on Tuesday, closing at 14.71 points, below the 200-day and 50-day moving averages. The trading code for this index is 'VIX', which closed around 15 points on Monday.

DataTrek Research co-founder Nicholas Colas said in a statement sent by email on Tuesday that this is 'a healthy sign, with readings expected to maintain this trend until the end of the year.' 'Do not believe in a stock market rebound based on a sustained high average volatility.'

As of this Tuesday, the s&p 500 index has risen over 25% this year. This includes an almost 5% increase so far this month, and when the election results on November 6 revealed that Donald Trump won the vote to become the next president, the stock market surged by 2.5%.

Colas said: 'After the election, there seems to be great enthusiasm for the stock market, and the vix index will be a way for us to monitor the US stock market before the end of the year.'

Investors seem confident about the bull market, partly due to the low readings of the vix index. Colas cited historical precedents, suggesting that the volatility index may help identify stock market bubbles.

Colas said: 'People tend to believe that strong call sentiment would result in particularly low vix readings, as its direction is inversely related to stock prices,' but this is not always the case.

He wrote: “A rebound based on an increase in the vix index is a signal of a bubble. If the stocks continue to rise while the vix index starts to reach +20, that would be a bad signal.”

DataTrek data shows that the valuation of the s&p 500 index is very high, with a pe of about 22 times the forward earnings from 12 months ago.

Kolas said: “Before the s&p 500 index peaked in March 2000 at the height of the 1990s internet bubble, the vix index was running above the long-term average for that time throughout 1999.”

DataTrek's explanation shows that the current long-term average of the vix is about 19.5. Kolas said: “Even with two significant crises in the 1990s, the average closing price of the vix from 1990 to 1998 was relatively low at 17.8.”

The closing high of the s&p 500 index during the internet bubble was on March 24, 2000, when the vix index was at 23.3. He said: “While this hasn’t been [very] unusual considering the past 15 months, it did mark the highest point of the s&p 500 index before 2007.”

Kolas said: “The vix index most often bottoms out in November and December. If the vix index trends upward while the stock market continues to rise for the remainder of this year, that would be a disturbing signal as it recalls 1999.”