Stock Market Boredom Could End With a Tumble - Barron's

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People walk by the New York Stock Exchange (NYSE)

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Never short a dull market, or so the saying goes, and this market certainly qualifies as a dull one. That maxim, however, might not apply this time around.

Just look at this market. The S&P 500, up 0.4% today, has risen just 0.6% in May. The monthly moves are slightly larger for the Dow Jones Industrial Average, up 1.6%, and the Nasdaq Composite, down 2.3%, but still look rangebound.

 And it’s not just that the market has gone quiet. Trading has cooled down as well. Since April 29, shares traded per day have trended down to just over 2 billion from 2.5 billion, according to FactSet data. Monday saw the lightest volume of trading for the entire year. If trading were to pick up, it could easily send shares higher—a painful outcome for anyone short the market.

Still, a dull stock market isn’t always followed by rip higher. A monthslong sideways move in 2015 ended with a tumble, for instance, when China’s renminbi suddenly tumbled.

And this market could be set up for a fall. The S&P 500 is up 24% since the start of October and it hasn’t experienced a drop of more than 7% since then. Usually, markets would be expected to experience a correction of at least 10% over that time frame. “From October to May, it’s quite a serious run without any kind of correction and therefore we should have some correction,” says Ron Meisels, president of Phases & Cycles. “We argue for a correction.”  

Others are also hesitant to call for a major breakout in stocks. In order for stocks to move aggressively higher upon a higher trading volume, it would likely take a positive fundamental surprise, says John Kolovos, chief technical strategist at Macro Risk Advisors. “The market would have to be caught by surprise by something,” Kolovos said.

One possibility would be a decision by the Fed not to reduce the size of its bond-buying program, Kolovos says. If the Fed doesn’t taper soon, investors will anticipate lower bond yields for longer, which would benefit all stocks and therefore encourage investors to transact across the market, lifting volume—and the S&P 500. 

Whatever it is, the market, which has already priced in booming economic and earnings growth, needs a positive catalyst. Without one, the next big move could be lower.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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