Sideways market may not be over yet

February 19, 201312 Comments

Back in January of 2001, I wrote an article on the history of secular sideways markets in U.S. markets for Canadian MoneySaver magazine. My article was amongst the first studies by a Canadian Technical Analyst to predict the 1999 – current sideways market. Here is a link to that article (note that, because I worked with Merrill Lynch at the time, I had to disclose at the beginning of the article that they were bullish with a price target on the S&P500 for 1700+ – despite my call for a decade or more of sideways markets. Guess who was right?):

My original thoughts were for the Dow to remain contained at or below 11,500. I was incorrect on my upper limit prediction – but the principal of a secular sideways market was correct. The question right now is, will the U.S market soon break out into a multi-year bull market – as happened after the last two sideways periods? The charts and market valuations may provide clues to answer that question.

Take a look at this week’s long term chart of the DJIA, courtesy of We’re some 13 years into the current sideways market. Past sideways markets, as you will see on the long termed chart above, have lasted anywhere from 12-17 years. So we may be closer to the end of the current secular sideways market than to the beginning of it. Thats a bullish argument for the market to break out sooner rather than later. However, observations of the last two sideways markets, which broke into almost 2-decade long bull markets when complete, show an interesting valuation metric prior to their breakouts. Lets look at the last two sideways market breakouts. At the end of the 1936 – 1950 sideways market, the Dow broke out from its 14-year ceiling of around 200. This occurred after the trailing PE ratio on the S&P 500 hit about 7. True, the S&P500 is a broader based index, but the PE level nonetheless did provide a market benchmark for valuations, even when observing the DJIA. The Shiller PE ratio, which is an inflation-adjusted version of the same ratio, also dropped into single digit territory in 1949. The end of the 1965-1982 sideways market was also marked by a single-digit PE ratio, hitting a low point of around 7 in 1980. This low point was earlier than the Shiller PE ratio, which hit about 7, but not until the final washout of the sideways market in 1982. In both of these cases, PE ratios hit single digits before the end of the sideways markets, marking the dawn of multi-year bull markets.

We can also look at the sideways markets that proceeded the last two. In the sideways markets ending in 1914 (not shown) and 1923, the S&P500’s trailing PE ratio dropped below 10 (it was near 5 in 1917). The Shiller ratio’s also touched or dropped below 10 on both of those occasions. However, the bull markets that proceeded these years were not as lengthy or as profitable as the bull markets that proceeded the breakouts following1950 and 1982. Interestingly, the sideways market ending in 1896 (not shown) was not proceeded by a single digit traditional or Shiller PE ratio. Casual observation may suggest that modern markets may be more sensitive to valuations and returns than they were when information flow was less prevalent. A longer chart for the Dow that shows the earlier two periods not shown can be seen in my book, Sideways.

The current trailing PE ratio on the S&P500 is 17.3. This is above the historic mean average level (since 1917) of 15.5. The current Shiller PE ratio is 23.4, which is above its historic mean average (since 1920) of 16.5. All of this data can be seen at

Valuation measurements such as trailing and Shiller PE ratio’s do suggest that markets are not yet at the historic low levels that typically proceed a breakout from a secular sideways market. Moreover, it would appear that current PE ratios are somewhat above their historic mean-average levels – implying a market that is not undervalued at this point. I continue to believe that, while markets may have a little juice in them yet, risk is beginning to outweigh potential reward.

True, the US Federal Reserve has implemented several monetary stimulus programs that may drive markets into a new secular bull market without the traditional conditions in place for such a breakout. However, to quote the great investment icon Sir John Templeton: “The four most dangerous words in investing are This time is different.”


Keith Speaking in Orillia–cancelled due to weather 

Seminar cancelled due to snow squall warning – It was going to be at the Orillia Public library at 6:30pm tonight for my “Sideways” book promotion tour.


  • Yes I suspect with the masses now expecting a correction the market will do the opposite and slowly grind higher.

  • Hi Kieth,

    GOLD and SILVER have been making lower highs and lower lows the past few months. Do you have levels that could be good entry points for the long side?


    • I unfortunatly hold some gold at this time, thankfully its not too much. I think it will get to $1550 on the low side, find support and hopefully rally. A failure there will be a very strong sell signal.

  • Keith,

    Kudos for predicting the this bear market in 2000 – talk about going against the herd!

    I think both valuation & duration are suggesting that this bear market is not over yet.

    Duration: The last 3 bear markets had durations of 17-25 yrs. Since this current bear began with an unprecedented Shiller P/E of 44, this bear’s duration can potentially be longer than normal.

    Valuation: At the Mar 2009 lows, we worked down to a P/E of 15. Although this is huge progress grinding down from 44, all 3 past bear markets ended with P/E’s in the single digits.

    The more challenging question is: Do we correct through time or through price? A major price crash would get the P/E to single digits and end the bear market in less than 20yr duration. Otherwise, we having a long boring sideways market as earnings slowly play catch-up.

    This same topic was discussed yesterday on another blog. I’ve always been using Shiller P/E for valuation but it’s interesting to see someone looking at Market Cap/GDP:

    • Thats a good point Gogi–PE contractions can occur by flat prices in a rising earnings environment. We’ll see.
      Or, perhaps the market will ignore everything and go higher due to the Fed stimulus. This reminds me of 2007’s oil prices. I sold oil in late 2007 at $80 due to parabolic price movements – it looked to be way ahead of itself. But the bubble continued, and it peaked at $147 in May 2008. Ouch for me! But, ultimatly, I was right, as it went back down into the $39 area by March 2009. I re-bought it that spring in the $40’s for a very nice trade. Cant say that I felt good as it continued into super-bubble territory after I sold it (at the time, all of the books on “peak oil” theory were popular). But looking back, I am glad I did sell it, even if hindsight shows I could have stayed longer in the trade.
      So sometimes you can be wrong for a while, but if your analysis is logical–you wont likely be wrong forever. Thats the way I feel about todays markets. Yes, they could overshoot, but it wont likely last forever!

  • Yes, we could always grind higher. Since flat/down/up are all possible outcomes – I don’t know how I’d keep myself sane if I didn’t follow support/resistance on charts 🙂

  • “I think [gold] will get to $1550 on the low side, find support and hopefully rally. A failure there will be a very strong sell signal.”

    Agree completely. Gold support at $1550 and S&P resistance at 1550 are the two biggest things I’m watching right now. Exciting juncture!

  • Dear Keith

    I recently bought BMOs ZUT @ 15.50 on your rec and then sold as it soared past its previous high.Lately I have been looking to buy back in. Why has this sector pulled back and where do you see support or should I just wait for a general pullback in the market.Thanks

    • Hi Doug
      I dont usually do individual stock comments on this blog, but as I’ve covered this on BNN in the past, I dont mind in this case.
      Its got a trading range with support at $15.80-ish. Resistance is at $16.50-ish. Pretty tight range, so its ok for a buy/hold approach, especially since it pays 5% dividend. But, if you trade it, thats the current pattern.

  • Dear Keith;

    I recently bought BMOs ZUT @ 15.50 on your BNN rec and then sold as it soared past its previous high. It has since fallen back and I would like to buy back in. Why do you think in has not held up during this rally,where do you see support or should I just wait for a general pullback in the general market. Thanks.

  • Do you use charts with adjusted or unadjusted data for stock splits and dividends. Which is best for technical analysis? Thanks

    • Hi Dave
      I use 3 charting services, all of which adjust for stock splits. You do want that feature, as splits still reflect investor buy/sell prices (investor X owned 10 shares at $10, now owns 20 shares at $5, still has the same ACB so his decisions to buy or hold –which is what creates support and resistance–will adjust to his ACB).
      the services I use are:,, Thomson Reuters
      The real difference between these are the histoical data (freestockcharts has longer data on the major indices) and Thomson has no reinvestment of dividends


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