“Never short a dull market.” – Old trading adage

The stock market has become unquestionably dull in recent days. Volumes are down and volatility, as measured by the VIX Index, has plummeted. In the past 4 weeks, this index has declined by over 55%, the largest 4-week decline in history.

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At under 12, the VIX is now in the lowest decile of historical readings since its inception in January 1990 (for our latest research on volatility, click here). Had one attempted to short such a “dull” market in the past, how would they have fared?

Not well, as the stock market has historically continued to rise over the next 1-12 months, with a median 12-month return of 10.5% (see first row in table below).

This may not be surprising as it confirms the old adage. What is surprising to many, though, is that shorting markets that aren’t particularly dull isn’t any easier. In fact, the most exciting markets with the highest volatility have historically shown the highest forward returns.

The median 12-month S&P 500 forward return following the highest decile VIX levels (VIX >29.02) was 24.0%. This is well above the median 12-month return for all periods at 12.8% and the 10.5% median return for “dull” markets.

Never short a dull market? Sure. But a more accurate saying based on the historical evidence would actually be: “Never short any market, but be particularly careful shorting an exciting one.”