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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

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“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 potential weakness is the “crazy bullishness on gold” among the right-wing pundits like Ron Paul who have a long-standing affinity for the medal.

“They’re all on the bandwagon because of the rally in gold,” he says.

As with gold, he expects a similar seasonal pattern in other precious metals and copper. They will be weak from now through the end of the year, with a possible bounce in the middle of October.

Buy the dollar

Gold and the dollar have such a strong inverse relationship, if you are long gold, you are basically short the U.S. Dollar Index /zigman2/quotes/210598269/delayed DXY -0.09% . That’s not a good place to be, with gold about to fall. Better to be long the dollar now.

“I’m wildly bullish over next six months,” says Williams.

He bases this call on where the dollar is in a 60- to 70-day cycle that tends to play out over time. It’s now coming off the recent lows in early September. He also cites readings from the Commitment of Traders Report showing that “smart money” commercial buyers are getting long the dollar, which is unusual.

“There’s a pretty good rally coming in the dollar,” he says.

Stock ideas

Here are some stock patterns that should play out over the next several months, according to Williams’ system.

• Amazon.com /zigman2/quotes/210331248/composite AMZN +2.15% tends to decline now through mid-October and even through to Christmas, but then it returns to rally mode. Williams expects the same thing this year. This is a “high conviction” call, he says.

• It makes sense to buy retail names just before Thanksgiving for the typical rally that plays out for a few weeks heading into the holiday shopping season. Names to consider at that point include: Walmart /zigman2/quotes/207374728/composite WMT +0.31% , Target /zigman2/quotes/207799045/composite TGT +1.10% , Home Depot /zigman2/quotes/208081807/composite HD +0.24% and Costco Wholesale /zigman2/quotes/201191698/composite COST +0.92% .

• Sell jewelry stocks such as Tiffany /zigman2/quotes/209249105/composite TIF +0.05% and Signet Jewelers /zigman2/quotes/204614427/composite SIG -0.26% in the middle of December because they tend to go down in January for a month or so.

• International Business Machines /zigman2/quotes/203856914/composite IBM -0.18% tends to rally from late October, suggesting the stock will be a good trading buy in that time frame.

• Buy natural gas because Williams expects it to rally. If he’s right, this would be good for natural gas-related stocks I’ve recently suggested in my stock letter, Brush Up on Stocks, or Continental Resources /zigman2/quotes/200740136/composite CLR +0.40%  and Comstock Resources /zigman2/quotes/205709071/composite CRK -0.39% . Continental Resources founder Harold Hamm has been a big buyer of his stock. Comstock is implicitly backed by Dallas Cowboys owner and energy investing expert Jerry Jones, who owns a majority stake in this name.

Also consider exchange traded funds like United States Natural Gas Fund /zigman2/quotes/205527422/composite UNG +2.10% , ProShares Ultra Bloomberg Natural Gas ProShares /zigman2/quotes/210336898/composite BOIL +4.15% , ProShares UltraShort Bloomberg Natural Gas /zigman2/quotes/209954846/composite KOLD -4.01% , United States 12 Month Natural Gas Fund /zigman2/quotes/204936853/composite UNL +1.59% and iPath Series B Bloomberg Natural Gas Subindex Total Return ETN /zigman2/quotes/208247226/composite GAZ +1.85% .

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned CLR and CRK. Brush has suggested AMZN, IBM, WMT, TGT, HD, TIF, CLR and CRK in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.

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Michael Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. Brush has covered business for the New York Times and The Economist group. He attended Columbia Business School in the Knight-Bagehot program.

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