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THE RIGHT STOCK AT THE RIGHT TIME CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page i CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page ii THE RIGHT STOCK AT THE RIGHT TIME Prospering in the Coming Good Years LARRY WILLIAMS JOHN WILEY & SONS, INC. CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page iii Copyright © 2003 by Larry Williams. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. ISBN: 0-471-43051-X Printed in the United States of America. 10987654321 CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page iv For more information about Wiley products, visit our web site at www.wiley.com. web at www.copyright.com. Requests to the Publisher for permission should be addressed to ACKNOWLEDGMENTS This book would never been possible without books and research that went before. I want to specifically thank Yale Hirsch, of the Stock Traders Almanac, and Steve Moore and Nick Colley of Moore Research. The high-yield strategy could not have been accomplished without the efforts of Bill Aronin, Joe Getts, and Lisa Liang at Qualitative Analytics. Without my able assistant, Jennifer Wells, this book, and all my other work, would never get done. Nor would this book have seen the light of day with- out the support and attention of Pamela Van Geissen. Tom DeMark was a great sounding board for many of the ideas and my best cheerleader. Finally, a personal note of thanks to Harvey Levine, who kept me running in more ways than he knows, and Louis Stapelton for the title idea. We are all indebted for the assistance these wonderful people, espe- cially Carla, provided in helping me present my vision of what will happen in the next few years. And finally I would like to point out what my best five investments have been: my children, Kelley, Jason, Sara, Michelle, and Paige. Thanks, gang, for many years of the best returns of my life. v CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page v CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page vi CONTENTS PREFACE ix CHAPTER 1 The 10-Year Pattern in the United States Stock Market 1 CHAPTER 2 The Four-Year Phenomenon 15 CHAPTER 3 The Amazing October Effect 29 CHAPTER 4 How to Know for Sure the Bottom Is Here 41 CHAPTER 5 The Next Move Up: Why It Will Be So Spectacular 67 CHAPTER 6 The Purpose of Investing 85 CHAPTER 7 How to Supercharge Your Investment Return 97 CHAPTER 8 The Old Economy Is the New Economy 105 vii CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page vii CHAPTER 9 Measuring Investor Sentiment for Individual Stocks 123 CHAPTER 10 The Investment Challenge You Face 145 CHAPTER 11 Putting It All Together for Long-Term Investment Success 157 CHAPTER 12 Money Management: The Keys to the Kingdom 193 CHAPTER 13 Final Thoughts: Nonrandom Thoughts on a Random Market 205 INDEX 217 viii CONTENTS CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page viii PREFACE This story begins in 1962, the year I first began studying stock market prices. I had no knowledge of why the stock market crashed that year, other than what was released in the newspapers: President Kennedy had at- tacked the steel industry, prohibiting any increase in steel prices. That bit of bad business news knocked the stock market down hundreds of points. The newspapers, then as now, were filled with horror stories of people los- ing money, and of how bad the economy was. Many cried that this was the beginning of another 1929-like era. In hindsight, however, it was not a time to sell stocks; it was a time to buy stocks. October 1962 began a huge up move that would not culminate in a top until February 1966 when the Dow Jones Industrial Average sur- passed 1,000 for the first time in history—what some felt was an “astro- nomical level.” Frankly, it’s hard to recall anything that long ago, but the one thing I do remember is that nobody in the fall of 1962 was advising people to buy stocks or to take any kind of shot at the market. In retro- spect that’s what everyone should have done. What was present was one of the greatest buying opportunities that I’ve been fortunate enough to have lived through. Ten years later, 1972, saw a similar situation. Stock prices had been low, the economy was bad, and things looked bleak. Then lo and behold on one bright day the stock market, as measured by the Dow Jones Indus- trial Average, began to rally. As is usually the case, the savants and sages of Wall Street did not herald in this buy point. However, 1972 was not quite like 1962, a point that needs to be fixed in every investor’s mind. Seldom is one rally or year exactly like the prior period. Although there was a tremendous rally in the fall of 1972, it quickly gave way to a decline in 1973 and 1974 before the next substantial bull market began. My search for stock market truth, which began in 1962, included an interesting selection of books, among them Tides in the Affairs of Men by Anthony Gaubis and Edgar Lawrence Smith (Macmillan, 1939). These authors’ central point was that there is a 10-year pattern in the U.S. stock ix CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page ix [...]... RIGHT STOCK AT THE RIGHT TIME THE 1 THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET “It’s about time. ” —My U.S senatorial campaign slogan, 1978 What did the fall 2002 buying opportunity really mean? Are more fortunemaking buy points coming in 2005, 2006, 2007, and 2008? In this book I will go into detail explaining what I think will be the best buy points over the next 10 years That’s quite a... over; the good times are coming now as they will continue in the future This book aims to help you pinpoint when those times are most apt to occur I would like to personally welcome you into my world of speculation, into the art of divining the future, into the art of living not in the past but in the tomorrows in today’s be-here-now world LARRY WILLIAMS Rancho Santa Fe, California February 2003 RIGHT STOCK. .. buy point of the twentieth century That was followed by another superb buy point in 1992 Notice that for the past 100 years, these ideal buying points came in years ending with a two or a three If you had invested in just these years you would have substantially outperformed the investor who chose to continually buy stocks I find this rather amazing and, better yet, to be hard evidence that indeed there’s... break the consecutive string of the 11 winning years ending in a five? And how about that eight year in the pattern—would it also produce gains similar to those as it had in the past? Years ending in a five from 1885 through 1985 had produced an average gain of 23 percent; years ending in an eight had produced an average gain of 14.9 percent Keep in mind that the 1881–1990 data shows a total gain of... 40 years ago Figure 1.9 Dow Jones Industrial Average Decennial Pattern, 1970–1999 Source: Moore Research Center, Inc 10 THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET It does not matter whether you have been following the markets for 30 years or 30 minutes; you can see that there is more than “just an interesting pattern” at work here Far from it; what you are looking at is the ultimate insight... something going on in the U.S stock market—something that shows us when the 1 2 THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET best buying opportunities tend to occur They are usually to be found in the first part of the decade—namely, years ending in twos and threes Figures 1.1 through 1.6 are of historic stock market activity and are well worth your study The first, the Axe-Houghton index of stock. .. unfolds over the years The frame of reference does indeed seem to be the decennial pattern Within that framework there are particular times that one should look for optimal buy (and sell) points The first would be years ending in twos and threes, followed by the incredibly strong five years The next opportunity to look for a buy point is in the fall of any year ending in seven Finally, a long-term investor... Gould on the earlier data The pattern holds, telling us there is consistency to the concept What we see is that in the card game of the future pretty much the same cards were dealt as in the past Let me tell you how unusual this is Of the many trading systems and strategies I have developed in some 40 years of trading, the vast majority perform at about 40 percent efficiency after the test In other words,... However, most investors have a pretty good idea of companies they want to purchase; they just don’t know the right time to do so Buying or selling at the right time does make a huge difference As an example, on balance, if you purchased stocks at the start of the sixth year of the decade, you had to wait only until the eighth year to make money If you purchased stocks in the years ending in nine, you had... year in the decade produced a rally or a market-up move, making it the strongest year in the 10-year pattern Years ending in eight showed winners in 8 out of 10 occurrences The poorer-performing years were those ending in seven and those years ending in a zero, as the Edgar Lawrence Smith’s work had suggested That is well and good, but of greater importance to an investor is how much money was made in . 10:34 AM Page ii THE RIGHT STOCK AT THE RIGHT TIME Prospering in the Coming Good Years LARRY WILLIAMS JOHN WILEY & SONS, INC. CCC-Williams FM (i-xii).qxp. making buy points coming in 2005, 2006, 2007, and 2008? In this book I will go into detail explaining what I think will be the best buy points over the