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MACRO VIEW COLUMNS: There’s Little Edge to Trading a Market This Quiet

(Bloomberg) — There’s an old saying that you should never short a quiet market. That’s particularly the case for longer-term investors, for whom the vicissitudes of temporary market swings are (or at least should be) easily ignored. That doesn’t mean that investors should deploy cash when trading conditions are muted, however. Indeed, history suggests that short-term returns are pretty lousy when trading conditions are too quiet.

  • There are quiet markets, and there are comatose ones. Investors in U.S. equities seem to have confronted the latter recently despite North Korea tensions, another health-care failure, and an incipient tax policy announcement. Over the 11 trading sessions ending on Tuesday, the S&P 500 traded within a 0.84% range. Bloomberg’s daily open/high/low/close data starts in 1982, and that’s the tightest two-week range over that period
  • While there are different ways of defining a “quiet market,” looking at short-term trading ranges is an obvious one. So how does the S&P 500 typically fare when trading ranges are narrow?
  • If we group the rolling 10-day trading ranges of the SPX into deciles and look at the subsequent two-week performance of the index, an interesting phenomenon emerges. The average and median returns following the quietest markets are the worst of any trading-range decile, and it’s not particularly close
  • Granted, the returns are still slightly positive on average, so the old saw about not shorting still holds water. In fact, it’s hard to argue that there’s an edge either way when average returns are close to zero
  • Of course, investors in single- name stocks may wonder where all the talk of “quiet markets” is coming from. No doubt Apple shareholders who rode a nearly 10% decline in the stock over the past couple of weeks would have preferred the market to be a little quieter
  • This highlights another important truth: there’s usually plenty of action under the surface, even when index volatility appears moribund. Growth stocks have had a stellar 2017–a simple screen based on growth criteria has delivered a whopping 25% return this year. Yet performance in September has been sideways to negative, suggesting that investors may be cashing out ahead of earnings season — and a month with ominous historical precedents
  • Perhaps U.S. stocks are set to embark on another furious rally — after all, the dollar and Treasuries seem to have caught reflation fever again. If they do, it will be contrary to the lessons of history, which suggests that there’s little edge to trading a market as quiet as this one
  • NOTE: Cameron Crise is a macro strategist who writes for Bloomberg. The observations made are his own and are not intended as investment advice.

To contact the reporter on this story: Cameron Crise in New York at ccrise6@bloomberg.net

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