Markets rarely behave the way we expect them to. From a Covid low of <26k in March 2020, the Sensex crossed 70k in December 2023, and peaked around 86k in September 2024. Many believed the party would never end.
But since then, the index has stayed in a range of 73-86k for almost two years.
In hindsight, the markets have had many reasons to pause – elevated valuations, tariff uncertainties, wars, and supply chain disruptions.
Regardless of the reasons, what’s clear is that since early 2024, we are in what is called a “sideways” market. The optimists and pessimists seem to be equally balanced. This is not unusual. In fact, it is quite common and can persist for long periods.
What does this mean for investors?
Let’s look at some of the characteristics of such a market. The indices move in a narrow range, and portfolios and NAVs behave likewise. Narratives keep changing – from bullish to bearish and vice versa, and every piece of news leads to sharp reactions in share prices. But these are often reversed fairly quickly. Overall, very frustrating for investors.
But a “sideways” market can be very deceptive. Despite indices and broader markets being stuck in a narrow range, individual stocks (or groups of stocks) diverge widely in performance.
Over the past year (as of 27th May 26), the Sensex lost 7.4%, and the Nifty lost 4.4%. In the same period, 994 stocks gained more than 20%, while 792 stocks returned more than 30%.
On the flip side, 1895 stocks lost more than 20%, and 1223 stocks more than 30%. This is out of a total of 5000+ stocks that have been listed for more than a year. (Data sourced from screener.in.)
Another aspect of sideways markets is “sector rotation”, where some groups of stocks rise sharply while others lose. In the current market, we have seen private banks and IT companies lose out, while defence and power stocks have risen dramatically.
So even if the index doesn’t go anywhere, you could still make (or lose) a lot of money!
Such markets are often described as “stock-picker’s markets”. Unlike bull markets, where everyone makes money, or bear markets, where the opposite happens – during sideways markets we need to be much more selective.
While momentum traders might chase hot sectors, this is not an easy game, as trends tend to reverse unexpectedly on news flows, or hot sectors quickly get overvalued.
For the long-term investor, this is actually a time to focus on quality and valuation. Stocks with strong balance sheets and customer franchises tend to show their mettle in difficult times. Buying them cheap provides the factor of safety.
However, this may not be evident immediately, as turbulence in supply chains or demand could well result in disappointing results and panic selling. Even good stocks are not immune to news flows. No matter how smart you are, some of your picks will fall in the short run.
But who says investing is easy? And in times like these, it becomes even more difficult.
Be more diligent in your research, hold cash, wait for bad days to buy your preferred stocks, and exit overvalued sectors. This is not the time to stop your SIPs.
Above all, this is a test of patience. If you’re convinced about long-term earnings growth, hold tight and don’t get rattled by the daily swings.
Leave a comment