“Never short a boring market” is good advice when stock trading volume takes a summer vacation

“Never short a boring market” is an old saying on Wall Street. That’s good advice for the next few months, when stock trading volume is typically lower than average. Stock traders fear this summer doldrums will send stock prices lower, but history shows there’s nothing to worry about.

That doesn’t mean the US stock market will do well this summer. It just means that low trading volume in and of itself is nothing to worry about.

First, let’s review the volume data. The chart below shows each month’s average trading volume expressed as a ratio to its trailing 12-month moving average. On average since the early 1970s, this volume ratio begins to decline in the latter half of June, falling further in July, and August has the lowest ratio of any month.

(Note that this ratio is the correct trading volume metric to focus on, as volume itself has skyrocketed over the last 50 years. A simple averaging of each month’s raw volume would have been skewed by this secular trend.)

To test whether a weak market should be shorted, I calculated the correlation between a given month’s volume ratio and the S&P 500’s SPX.
total return in the same month. Over the entire period since 1970 there has been no statistically significant pattern.

However, it is interesting to note that in some decades the correlation was positive while in others it was negative. For example, in the decades of the 1970s and 1980s, there was a strong positive correlation between trading volume and the return of the S&P 500. In those decades, shorting a boring market might have paid off.

In contrast, since the early 1990s there has been a weak negative correlation between trading volume and the S&P 500. During these decades, the stock market tended to do better when volume was lower than when it was higher. Of course, in such an environment, you definitely don’t want to short a boring market.

A topic for another discussion would be why this correlation has changed. Perhaps high-frequency trading has skewed volume data? This is an intriguing hypothesis since computers don’t take summer vacations.

Next, I measured whether a given month’s trading volume had any value in predicting the return of the S&P 500 over the following quarter, six months, and 12 months. I got nothing, both overall and in each of the individual decades.

The point of this column is different: overall trading volume on the exchange is not in itself a helpful indicator of market timing, and low trading volume this summer is nothing to worry about.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

More: Inflation makes everything we buy more expensive, and once stagflation sets in, things could get even worse

Also read: Oil prices could become “parabolic” and put the global economy in a “critical situation,” says Trafigura boss “Never short a boring market” is good advice when stock trading volume takes a summer vacation

Brian Lowry

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