Financial markets go through various phases, also known as trends. A broad market, such as the stock market or the government bond market, can trend up, down or sideways. While it's easy to make money in an upmarket, downward trending or sideways markets present unique challenges.
A market is said to be in a trend if it is consistently moving in a particular direction. Up, down or sideways trends can last anywhere from days to decades. Generally, a trend that is sustained anywhere from a few days to a few weeks is referred to as a short-term trend, while those lasting from a few weeks to a few months are known as intermediate-term trends. A trend that lasts more than a few months is known as a long-term trend. Some trends can last for years or even decades.
Financial analysts identify an uptrend when they see "higher highs and higher lows." What this means is that every, or almost every, successive top and bottom is above the prior one. If a stock climbs to $10, retracts to $9 and then climbs to $11 before retracting again to $10.5, the conditions for at least a short-term uptrend are met. The second peak at $11 is above the previous peak of $10. The bottoms, which are at $10.5 and $9 are also advancing, thus confirming an uptrend. In a downtrend, both tops and bottoms are successively lower.
A market that has neither a clear up or down trend is said to be moving sideways. In such a market, the peaks and bottoms occur roughly where the prior peaks and bottoms took place. The stock market tends to trend sideways when the economy is stagnant, showing neither much growth, nor a significant retraction. The stock of a mature firm that rakes in consistent but unimpressive profits, with neither much risk to its business model, nor many growth prospects, could trend sideways. Bonds tend to trend sideways when interest rates aren't moving either up or down by much.
Trading Sideways Markets
If the stock market is trading sideways, dividends can save the day. When most stocks fail to advance much, those who pay a periodic dividend tend to be the most rewarding investments. A dividend refers to cash disbursements from the firm to its stockholders -- and is financed by profits. While dividend payments are relatively modest compared to the stock value, rarely exceeding a few percentage points of the stock's prevailing market price, they can be a lifesaver when most stocks do not appreciate even this much. International diversification is another alternative strategy in a sideways stock market. When U.S. stocks are trading sideways, looking into overseas investment opportunities could help you find the profits you seek.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.