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Never Short a Dull Market

What is a Dull Market? A dull market is a market categorized by below average or low market activity. A dull stock market consists of lower-than-average trading volumes, choppy trading ranges, and few price changes (i.e., low volatility – VIX index) sustaining from several days to several weeks.


The dull stock market may be indicating a consolidation period before the resumption of the primary trend where buyers and sellers are resetting the equilibrium levels via tight trading ranges.


Some traders sit out of this market environment because of the lack of volatility, and most importantly, lack of price and volume momentum (i.e., lack of technical breakouts). Other traders view a dull stock market as a buying opportunity to accumulate positions ahead of the next bull rally.


When the stock market is in a dull period, smart money and institutional investors quietly buy or accumulate positions without fearing the stocks will run away.


The difference between a dull market and a bear market is the former lacks market activities, and the latter shows a lot of activities, namely heavy selling. A bear market will be depicted on the charts by distribution type patterns such as lower-highs and lower-lows or primary downtrends.


Over the past month, since the early May 2021 highs, many stocks have traded sideways with low volume and subdued trading. Stock market indexes have struggled to confirm new highs and mega-cap technology names remain in consolidations.


Despite lackluster market actions and key indexes struggling to set new highs, the technical outlook for the stock market remains bullish.


The broader-based US stock indexes are also technically healthy. Two of the broadest US market indexes, such as Wilshire 5000 Composite Index (WLSH) and iShares Russell 3000 ETF (IWV), are close to new fresh highs, suggesting the broader US stock market may be stronger than the narrowed based market.


The advancing minus declining issues technical indicators (A/D line) are gaining strength across different US markets, as evidenced by the A/D lines breaking out to new all-time highs.


The CBOE Volatility Index (VIX) also shows that since the early 1990s, when VIX trades below 20 it is classified as low volatility or a dull market. Above 20 denotes high volatility or an exciting market. During periods of dull markets (VIX below 20), such as 1992-1996, and 2004-2006, and 2013-2017 the S&P 500 Index (SPX) generated favorable compounded annual total returns of 15%, 10%, and 15.5%, respectively. However, when the VIX spikes above 40% to exciting market levels, it has also led to excellent buying opportunities for SPX.

Although, it is difficult to say that the summer doldrum period of low market volatility, lackluster trading, and a dull market is the "calm before the storm" or just a consolidation phase before the resumption of the prevailing and dominant uptrend. Nonetheless, the favorable market internal readings of popular US stock markets coupled with the strength of two broad-based US stock market indexes (WLSH and IWV) suggest the bull rally is alive and well. It would be unusual to witness a market top on the backdrop of bullish market internals and when there is broad market participation across US stock market indexes.

In summary, dull markets are neither good nor bad. They are part of the phases of the stock market. As the saying goes, "never short a dull market" may be sound advice for investors. Although not as catchy, maybe the better phrase is "never short a dull market when market internals is strong."


Source: Courtesy of StockCharts.com

Source: Chicago Board Options Exchange and Federal Reserve of St. Louis FRED (fred.stlouis.org)

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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