Are investors dangerously complacent?

As major indexes continue to climb, some analysts suggest that complacency is reaching dangerous levels.

Investor complacency is measured in different ways, and one of the most closely watched is VIX, the CBOE S&P 500 Options Volatility Index, commonly known as the "fear index."

The VIX index has recently plumbed 52 week lows and recent closing prices in the 11 range put it near the all time intraday lowof 9.39.

Stock market volatility has been in steady decline, and the extreme drop in volatility recently prompted well-known hedge fund manager David Tepper to remark, "I am nervous. I think it's nervous time."

Although Tepper believes that now is not the time to be complacent, the VIX is telling us that investors have become very complacent. The stock market advances have been on relatively thin volume, while the declines have been on heavier volume. This sends a signal that the bull is feeling a bit lackadaisical. The market's big advances are being led by heavily-shorted stocks. In other words, the gains are most likely the result of short squeezes, rather than a bullish stock market.

(Shorting a stock is betting that prices will fall. To unwind a position, you have to buy an amount equal to what you sold -- a condition that's very painful if the stock rises sharply, forcing other short sellers to buy stock, too).

Another signal of investor complacency is the comeback in risk appetite. Frothy stocks have been making a comeback after April's wash out, and new strength is being seen in small caps and the Nasdaq.

Meanwhile, we're getting ominous signals from other corners of the market.

Over 2.6% of the S&P 500 market cap is currently held short and this is a level that hasn't been seen since 2008. Recently traders have pushed VIX call options to six year highs, again the most since 2008, as the VIX reaches bottoming levels from which advances oftentimes begin. Short sellers have dropped to roughly 20% of outstanding shares of the iPath S&P 500 VIX Short Term Futures ETN, down from a recent record of more than 100%. This data tells us that the savviest traders of all are betting on an increase in volatility which would likely be associated with a decline in equities as volatility re-enters the marketplace.

Many commentators have warned that the "sugar high" brought to the markets by virtue of the Fed's quantitative easing program should not be mistaken for economic strength. Recent earnings reports from the retail sector demonstrate that American consumers have still not completely regained the confidence lost during the Great Recession, and the important homebuilding market remains weak as a recent homebuilders' report called conditions "poor."

Even the Fed is getting in on the discussion as Dallas Fed President commented in a recent speech at the London School of Economics that the Fed has taken volatility out of the marketplace and so it's natural that people would be taking more risk. Fisher said that he didn't have any qualms about injecting more volatility into the markets and that more volatility could be healthy as long as it wasn't too extreme.

With the Fed tapering, mixed economic reports, extreme lows in VIX and new highs in the S&P 500, maybe it is "nervous time," indeed, as stock market volatility could be set to return after a long, long absence from the U.S. financial stage.

John Nyaradi is publisher of Wall Street Sector Selector, a financial media site and newsletter focused on ETFs and global financial analysis. Wall Street Sector Selector is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of USA TODAY.