Sideways Market

If there is one question that keeps coming up from within my loyal fan base, it is “Mr. Greenbacks, how far into the Great recession are we?”  Well, Grasshopper, that depends.  Right now things seemed to have stabilized at least in terms of the stock market and job losses.  I truly feel that the word “recovery” is a bit strong and premature for where we are right now.  Basically, I feel that we are about half way into this sideways market.  The theory of sideways markets has been put forth in a book by Vitaliy N. Katsenelson called The Little Book of Sideways Markets.  In his book, Mr. Katsenelson proposes that there are no real bear markets, except for the Great Depression.  All the subsequent downturns have been part of an extended “Sideways Market” where the market has ups and downs but remains flat until the next bull market kicks in.  A sideways market is characterized by P/E compression and generally lasts 20 years.  Historically, the P/E of the stock market has been about 16x earnings and we are currently around 20x.  During the height of the Great Recession in 2009, the P/E ratio dropped below 15x.Seeking Alpha Currenly, we are on the more expensive side of the chart as pictured below, but we are also experiencing record company profits due to the lean operations they are running.  Once businesses start hiring again, the margins will shrink and the P/E rations should come down as well.  One of the points that Katsenelson makes is that the only way to play a sideways market is to buy solid companies with strong brand recognition when they are undervalued, and get out as soon as they reach full valuation.  As a buy and hold investor, this goes against my principles, but I do agree on buying financially strong, dividend paying companies when they are beaten down.  In order to accomplish this, patience must be practiced.  If Mr. Katsenelson is correct, we are about half way through this sideways market (he argues that the current sideways market began in 2001) and can expect plenty of ups and downs in the near future before the next bull market takes over.  Until then, my suggestion is to make a list of desireable companies that you want to own, and strike on the dips.  Only time can tell whether we are in a sideways market or not, but buying strong companies when they are out of favor with Mr. Market is always a good idea.

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