But am not sure what is "right".
In the end what is “right” is up to you. Conventional wisdom however may differ.
To expand on what Randy said as a general rule you want to use Dolby Digital or DTS if that’s what the source is. How “Direct” mode effects these on the Onkyo may differ but on my Denon “Direct mode + DD or DTS leaves everything in 5.1 and doesn’t pull out the rear channels for 7.1. But from what you described it sounds like the Onkyo leaves out the subwoofer which is consistent with what it does in 2ch.
Not using “direct” mode will cause your receiver to use matrixed surround modes like DD PLIIx or DTS NEO-6 IMO not as clear cut as using DD and DTS.
For mutli- channel audio of any kind Dolby Surround, Dolby Digital, DTS…I always use the matrixed modes with one exception. I’ve found that with certain games 5.1 direct sounds better. Choosing “direct” or “matrixed” modes for 2ch is where I think conventional wizdom falls apart and you just need to go with your ears.
I find that some 2ch recording sound best in “direct” and others in “matrixed” modes. As a general rule I think recordings with lots of ambience like live concerts sound best “matrixed” whereas most studio recording sound best in “direct” mode. Only way to tell what’s best for you is to try them.
For 2ch as Randy said the Onkyo‘s “Direct” mode bypasses bass management, surround matrixing, and also Audyssey. Others reading this should note that not all receivers bypass bass management in “Direct” mode. My Denon doesn’t because you choose to use bass management in 2ch from an advanced menu setting separate form normal multi-channel settings.
Finally, there are likely other modes like “Multi-Ch stereo,” “Concert Hall”…which you can try. I use “Multi-Ch Stereo” for some TV shows on which DPLIIx and NEO-6 are having little effect. For headphones the Denon has a “Virtual” setting that helped movies/TV sound more 3d but you’ll just have to give the ones on your Onkyo a try to see if you like them for anything.
Cheers,
Dean
