An eerie calm has descended upon the stock market. Despite the threat of an oil shock resulting from the rapid successes achieved in recent days by radical Iraqi Sunni Muslim insurgents in that country and mounting geopolitical events elsewhere, including warfare in Ukraine that could eventually deprive Western Europe of natural gas supplies from Russia, investors believe all is well.

Trading volume continues to dry up, which is somewhat worrisome. Last week saw another drop in trading activity on the New York Stock Exchange to a level that, excluding holiday-shortened weeks, has only occurred on a handful of occasions in the past 16 years. But this appears to be just a part of the “new normal” in which we find ourselves.

Also raising eyebrows: the low level of expected market volatility. This is reflected in option pricing, which, while it has inched up from its recent lows, remains at an extremely low level—last seen in 2007. That’s not altogether surprising in light of the fact that we haven’t experienced a daily move of 1 percent, either up or down, on the S&P 500 in the past two months. And we’ve only had 16 such days so far this year. For perspective, consider that 1-percent daily swings occurred on average more than 75 times annually during the last five years

While light trading volumes may be here to stay, you can at least count on volatility reverting to type. Some institutional investors are betting that an increase in volatility may not be far off and will occur in the form of a big downdraft in share prices. But history isn’t exactly on their side.

In recent weeks we’ve seen a notable increase in put option buying on the S&P 100 (OEX). Buying a put is a bet that a given stock or market index is going to decline. In the past two years, the OEX’s put/call ratio has averaged about 1.3, meaning put buying has exceeded call buying by 30 percent. But in the latest week the figure has jumped to 2.67, the highest level in at least the last two decades, if not longer. 

Collectively, the large traders who traffic in OEX options don’t have a great track record, buying when they should be selling and selling when they should be buyers. Chances are they’re in for another disappointment. On past occasions in which there have been such a lopsided put/call ratio as we see today, stocks typically (although not invariably) have rallied in the following months.

Since the start of this century the OEX put/call ratio has only been above 2 on 11 occasions. One of those occurred as the tech bubble was bursting and resulted in a 9 percent decline in the following 13 weeks. The only other meaningful decline was a 4.5 percent retreat in 2011. Even including those losses, however, the average gain following such readings was 3.8 percent. This isn’t a fool-proof market timing tool, but it’s a good one nonetheless.

Small investors, meanwhile, who tend to stick with options traded on the Chicago Board Options Exchange, are only slightly less bearish than normal at present, offering no real insight on where the market is headed.

Even ignoring recent institutional option trading activity, despite what may be construed as unusual investor complacency, or apathy if you will, the stock market does not appear in danger of falling to any real degree. Indeed, while richly valued, the market’s path of least resistance may actually prove to be somewhat higher in the near future.

That said, we will caution you that stocks have come a long way in the past few years and the market is currently overbought. Conditions can change rapidly and if we see signs of deterioration in fundamentals we’ll let you know.