Dow and S&P 500 About to End 13 Years of Sideways Action?

February 21st, 2013

by Chris Kimble

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


The chart below reflects that since the late 1800's, the Dow has experienced three extended periods where it essentially traded sideways, ranging from 13 to 17 years. The S&P 500 finds itself within a few percentage points of where it was 13 years ago.

The prior sideways markets ended with upside breakouts. Based on duration of time frames, the patterns suggest the markets are close to an upside breakout again.

However, where did the P/E ratio stand when prior breakouts took place?

The above chart is one of Doug Short's monthly valuation updates, this one based on the long-term P/E ratio of the S&P Composite developed by Crestmont Research.

I've highlighted what the P/E ratio was at the end of the prior 13-17 year sideways markets, which ranged from 6 to 7. The current P/E ratio stands at 21. Investors might take note that if you excluding the P/E ratio peak in 2000 (33.8), the current P/E ratio is much closer to market highs than lows over the past century!

A Power of the Pattern perspective … notice that at the end of prior long-term sideways markets, steep bearish rising wedges weren't in place like they are today.

Can the markets break to the upside of the current 13-year sideways pattern? Yes they could. Anything is possible, and investors have to remain open-minded to all possibilities!

How many long-lasting bull markets have started when the P/E ratio stood at 21? Not too many so far!

Will it be different this time? Stay tuned!

If you would like to know how our members are attempting to take advantage of this situation, send an email to services@kimblechartingsolutions.com.

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