Looking at the close of the CBOE Volatility Index (VIX.X)  at 13.02 on Monday, Oct. 24, and comparing it with current levels at about 20.18, shows that volatility has increased dramatically in a little more than a week, while the decrease in the stock market has been muted.

Said differently, a drop in the S&P 500 to 2,100 from 2,151.33 doesn't merit a 50% increase in the VIX.

To what can we attribute this increase in volatility?

Those who guess Federal Bureau of Investigation Director James Comey, an email investigation and what appears to be a possible reversal of outcome from a Hillary Clinton landslide to a potential Donald Trump victory are correct.

The VIX is usually reactionary, which can be characterized as the dog wagging the tale and follows what the S&P 500 is doing. Right now, however, it is anticipatory, with the tail wagging the dog, and that tail is that nobody knows what to expect on Election Day.

Here is what volatility is saying about next week.

We thought Democratic presidential candidate Clinton was going to win as of last week. Now we aren't so sure.

We think the market will go down if Republican candidate Trump wins, but we don't think it will go down as much as others think it would or we would be selling more right now. But Clinton still has a good chance of winning, and we don't want to be caught out of the market if there is a subsequent rally like the one in June after the Brexit vote in the U.K.

Is the market saying anything else? The answer is yes.

The 10-year Treasury bond has seen a gradual increase in rates over the past three months to a 1.85% yield from just 1.45% at its summer low. This tells us that we have seen one of the very rare instances where rates have increased while stock prices have gone down.

This means that if an investor holds a balanced portfolio of stocks and bonds, he or she is losing with both. This isn't something that people are accustomed to seeing.

The relationship between stocks and bonds is negatively correlated. However, that doesn't mean that it is negatively correlated in every instance.

Similarly, the relationship between stocks and volatility is also negatively correlated. What we are witnessing is a decoupling of this relationship for the time being, and instead of a flight to bonds or quality when things get dicey we are seeing stocks and bonds lose their value.

What turns this around? No one event turns this around, but we can bet that the market will again return to its reactionary mode instead of anticipatory mode soon.

In the end, from a more realistic viewpoint. VIX levels are at around their average since inception, and we are back to normal levels of fear in the stock market, which have rarely been seen over the past few years. There doesn't seem to be anything extraordinary to worry about, which is encouraging because this has been a zombie stock market for what seems like forever.

The VIX at these levels is still greater than the CBOE S&P 500 3-Month Volatility Index  at 19.58, while the November VIX and December VIX are at 18.55 and 18.25. What is confusing is that the January VIX is at 19.15.

Normally, there is a linear to curved relationship in VIX, but as we can see, November is greater than December, but both are less than January. What this means is that storm clouds are on the horizon.

This article is commentary by an independent contributor. 

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