Volatility Chart Vix and VXN Shows Fear From Mondays Crash

http://ca.finance.yahoo.com/echarts?s=%5EVIX#symbol=%5EVIX;range=1d

January produced the worst stock market performance since May 2012 and February has not gotten off to an auspicious start, as the benchmark S&P 500 index lost 2.3% on Monday, while the narrower Dow Jones Industrial Average (DJINDICES: ^DJI ) fell 2.1%. Small-capitalization issues -- which outperformed their large-cap brethren last year -- fared even worse, as the Russell 2000 Index posted a 3.2% drop.

Meanwhile, the "fear trade" was a winner today, as the SPDR Gold Shares (NYSEMKT: GLD ) rose 1%. The VIX (VOLATILITYINDICES: ^VIX ) , a measure of investor expectations for stock market volatility over the next 30 days that is known as "Wall Street's fear gauge." gained 16.5%, to close above 20 for the first time since December 2012. For the S&P 500, today's decline was the worst since a 2.5% loss registered on June 20, 2011...

...Which gets us to the core of the matter: Slowing manufacturing is not the underlying cause of today's stock market decline, it is simply a catalyst. Instead, it looks to me as if we may we witnessing the first results of a collision between two (related) factors:

• Stock market values that became overextended after a 30% run-up in the S&P 500 in 2013.
• A market that is rediscovering risk (i.e., normalizing) as the Federal Reserve begins to slow the extraordinary stimulus it has been providing asset markets through its bond purchase program.

Is this cause for concern? Not for genuine, prudent investors -- those who are neither leveraged, nor short-term-oriented. After all, volatility is a normal characteristic of the stock market. Since 1957, the S&P 500 has experienced a 10% correction nearly every one and a half years, on average; the last correction began more than two years ago in the summer of 2011.

 Fool.com