NEW YORK, Aug 14 (Reuters) - Wall Street's most-watched

gauge of investor anxiety is continuing its speedy retreat from

panic levels, suggesting that investors may be returning to

strategies that bank on low stock volatility despite a

near-meltdown in equities early this month.

The Cboe Volatility Index slipped to 16.31 on

Wednesday, its lowest level since the beginning of the month.

The index hit 65 on Aug. 5 and closed at a four-year high of

38.57 on that day as investors roiled markets by unwinding

several massive positions such as the yen-funded carry trade.

If the index's level holds into the close, the seven trading

sessions it took the VIX to return to its long-term median of

17.6 will be the index's quickest ever drop from 35, a level

associated with a high degree of fear. Similar reversions in the

so-called fear gauge have, on average, taken 170 sessions to

play out, according to a Reuters analysis.

Some options mavens believe the rapid retreat in the

so-called fear gauge signals investors have returned to

strategies that bank on markets remaining calm to deliver

profits. Among those is the dispersion trade, in which investors

seek to take advantage of the difference between index-level

volatility and volatility in single stock options, analysts

said.

"What we saw (on Aug. 5) was a unique confluence of events,"

said Steve Sosnick, chief strategist at Interactive Brokers. "I

think it's also quite remarkable how quickly everyone reverted

to the same playbook that has been working for them once it was

established that those events appear to be temporary."

The S&P 500 has risen 5% from its Aug. 5 closing level while

the tech-heavy Nasdaq Composite is up 6% from that day's close.

Both indexes are up about 14% on the year.

The sharp retreat in the VIX also backs the idea that last

week's record jump was fueled by technical factors rather than

longer-term angst over global growth, analysts said.

The VIX, which is calculated from S&P 500 options quotes in

real time, may have been driven up excessively due to lower

liquidity in pre-market hours on Aug. 5, according to market

participants.

The sudden break from months of stock market calm may have

also jolted some investors who had piled into various

options-based bets on continued market calm to rush to exit

those positions, further amplifying the VIX surge.

"It was much more about market structure issues ... it was

about short volatility traders being forced to close out when

things had gone up against them, and it really wasn't about a

real fundamental shock," said Michael Purves, head of Tallbacken

Capital Advisors.

"If we had a fundamentally driven VIX spike because

something really bad was happening in the economy or world, then

you wouldn't see this type of plunge in the VIX from that high

level," Purves said.