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Sept. 21, 2020, 9:35 a.m. EDT

Stock market is at the start of a selloff, says veteran trader Larry Williams

Williams, age 77, is focused on seasonal patterns that consistently play out over time

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By Michael Brush, MarketWatch

Larry Williams

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 /zigman2/quotes/210599714/realtime SPX +0.34% , Nasdaq /zigman2/quotes/210598365/realtime COMP +0.37%  and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.10%  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, 77, 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.

/zigman2/quotes/210599714/realtime
US : S&P US
3,465.39
+11.90 +0.34%
Volume: 2.16B
Oct. 23, 2020 5:15p
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/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
11,548.28
+42.28 +0.37%
Volume: 2.88M
Oct. 23, 2020 5:16p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
28,335.57
-28.09 -0.10%
Volume: 350.10M
Oct. 23, 2020 5:15p
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