Attention, investors: Spooky times are on the way for the stock market.
You should trust your instincts if you’re nervous because of the wobbly action in the S&P 500 Index
and the Dow Jones Industrial Average
since these indices got slammed in early September.
Starting right about now, the stock market will see a significant and sustained selloff through about Oct. 10. Don’t look to gold as a hedge. It’s riding for a fall, too, despite the widespread misbelief that it protects you against losses in weak stock markets.
The bottom line: Ghosts and goblins come out in the market in the runup to Halloween, and we can expect the same this year.
That’s the view of trader Larry Williams, who offers weekly market insights at his website, I Really Trade. Why should you listen to Williams?
I’ve watched Williams accurately call many market twists and turns in the 15 years I’ve known him. I know of more than a few money managers who trust his judgement. Williams has won or placed well in the World Cup Trading Championship several times since the 1980s, and so have students and family members who apply his lessons.
He’s popular on the traders’ speaking circuit both in the U.S. and abroad. And Williams is regularly featured on Jim Cramer’s “Mad Money” show.
Time-tested mix of indicators
To make market calls, Williams uses his own time-tested mix of fundamentals, seasonal trends, technical signals and intelligence gleaned from the Commitment of Traders report from the Commodity Futures Trading Commission (CFTC). Here’s how he thinks about the three types of positions the CFTC reports. Williams considers positioning by commercial traders or hedgers and users and producers of commodities to be the smart money. He thinks large traders, mainly big investment shops, and the public are contrarian indicators.
Williams mainly trades futures because he thinks that’s where you can make the big money. But we can apply his calls to stocks and exchange traded funds, too. Here’s how he’s positioning for the next few weeks and through the end of the year, in some of the major asset classes and stocks.
Expect an extended stock market selloff
To make market calls in September, Williams turns to what he calls the Machu Picchu trade, because he discovered this signal while traveling to the ancient Inca ruins with his wife in 2014. Williams, who is intensely focused on seasonal patterns that consistently play out over time, noticed that it’s usually a great idea to sell stocks — using indexes, mostly — on the seventh trading day before the end of September. (This year, that’s Sept. 22.) Selling on this day has netted profits in short-term trades 100% of the time over the past 22 years.
Williams also notes that selling on the 11th through the 20th trading day of September has been the right thing to do 80%-95% of the time, with one exception. Sales on the 17th trading day net gains 75% of the time — still not bad.
This year, that means the time for selling is Sept. 15-28. The percentage success rates cited above are for very short-term multi-day trades. But stocks tend to peak for the month in this time range, and then stay weak through around the middle of October. He thinks the pattern will repeat again this year.
“We’re most likely going to have a pullback in the market here,” says Williams.
One caveat: Watch the advance-decline line, one of Williams’ favorite indicators. If fewer stocks are declining relative to advancers on days the stock market is weak, or if there is a broadening out of participation on up days, this is a sign the any selloff may be coming to a close.
“If great breadth comes in to the market [on up days], then I will get bullish,” he says.
Gold offers no hedge
A lot of people think gold serves as a hedge during stock market declines, but this isn’t true, says Williams. Gold has slumped along with stocks in most of the major market selloffs. He expects the same over the next three to four weeks. He’s advising gold traders to sell any rallies now, and then revisit when gold falls later this year to buy back lower.
To make this call, Williams looks at the typical seasonal pattern for gold that plays out every year, and also the historical trends in election years. The conclusion: Gold typically peaks around the middle of September then weakens for most of the rest of the year. This year, gold has underperformed its typical seasonal pattern, which is bearish for the metal.
“Gold has not been able to stay in step with what happened in the past, therefore the seasonal pattern should work this year,” he says.
Another sign of…