Tuesday, February 2, 2010

Who’s Afraid of a Sideways Market?

Robert Hagstrom

Variations within a sideways market can still be dramatic and lead to plenty of opportunities for excess returns.

For the last 25 years, investors have experienced two types of stock markets--bull and bear--that either went up or down over a multi-year period of time. But there is a third type of market with which many investors today are not as familiar. It is called a “sidewinder” and it produces a sideways market--one that barely changes over time.

It has been a generation since investors have experienced a prolonged sideways market (although they were not uncommon through most of the 20th century). The last major sideways market occurred from the mid-1970s until the early 1980s. On Oct. 1, 1975, the Dow stood at 784. Nearly seven years later, on August 6, 1982, just before the beginning of the great 1980s Bull Market, the Dow closed at the exact same 784. The price return over the seven-year period was zero.

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