<s> CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page i
THE RIGHT STOCKAT THE RIGHT TIME
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page ii
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page iii
THE RIGHT STOCKAT THE RIGHT TIMEProspering in the Coming Good Years
LARRYWILLIAMS
JOHN WILEY & SONS, INC.
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page iv
Copyright © 2003 by Larry Williams. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning, orotherwise, except as permitted under Section 107 or 108 of the 1976 United StatesCopyright Act, without either the prior written permission of the Publisher, or authorizationthrough payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc.,222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on theweb at www.copyright.com. Requests to the Publisher for permission should be addressed tothe Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ07030, 201-748-6011, fax 201-748-6008, e-mail: permcoordinator@wiley.com.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties with respectto the accuracy or completeness of the contents of this book and speciﬁcally disclaim anyimplied warranties of merchantability or ﬁtness for a particular purpose. No warranty maybe created or extended by sales representatives or written sales materials. The advice andstrategies contained herein may not be suitable for your situation. You should consult with aprofessional where appropriate. Neither the publisher nor author shall be liable for any lossof proﬁt or any other commercial damages, including but not limited to special, incidental,consequential, or other damages.
For general information on our other products and services, or technical support, pleasecontact our Customer Care Department within the United States at 800-762-2974, outsidethe 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 appearsin print may not be available in electronic books.
For more information about Wiley products, visit our web site at www.wiley.com.
ISBN: 0-471-43051-X
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page v
ACKNOWLEDGMENTS
This  book  would  never  been  possible  without  books  and  research  thatwent before. I want to speciﬁcally thank Yale Hirsch, of the Stock TradersAlmanac, and Steve Moore and Nick Colley of Moore Research.
The high-yield strategy could not have been accomplished without theefforts  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 agreat 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 moreways 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 happenin the next few years.
And  ﬁnally  I  would  like  to  point  out  what  my  best  ﬁve  investmentshave 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 vi
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page vii
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 viii
viii
CONTENTS
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
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page ix
PREFACE
This  story  begins  in  1962,  the  year  I  ﬁrst  began  studying  stock  marketprices.  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 bitof 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 thebeginning of another 1929-like era.
In hindsight, however, it was not a time to sell stocks; it was a time tobuy stocks. October 1962 began a huge up move that would not culminatein 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 theone thing I do remember is that nobody in the fall of 1962 was advisingpeople 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 ofthe greatest buying opportunities that I’ve been fortunate enough to havelived through.
Ten  years  later,  1972,  saw  a  similar  situation.  Stock  prices  had  beenlow, the economy was bad, and things looked bleak. Then lo and beholdon 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 ofWall Street did not herald in this buy point. However, 1972 was not quitelike 1962, a point that needs to be ﬁxed in every investor’s mind. Seldom isone  rally  or  year  exactly  like  the  prior  period.  Although  there  was  atremendous  rally  in  the  fall  of  1972,  it  quickly  gave  way  to  a  decline  in1973 and 1974 before the next substantial bull market began.
My search for stock market truth, which began in 1962, included aninteresting selection of books, among them Tides in the Affairs of Men byAnthony  Gaubis  and  Edgar  Lawrence  Smith  (Macmillan,  1939).  Theseauthors’ 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 x
x
PREFACE
market  and  economy.  The  thrust  of  their  argument  was  that  most  stockmarket highs come in the latter part of every decade. By that they meantthat one was more likely to ﬁnd stock market highs in years ending in sixand nine, such as 1966 and 1929. Gaubis and Smith looked at the cyclegoing back into the earlier part of the 1900s and presented their case inthe book.
As a young man I simply had no perspective, as well as very little con-ﬁdence that this long-range pattern (or cycle) really worked. I wondered ifit would hold in the future. I did not know this then, but I sure do now.While certainly the 10-year pattern has not precisely called all major mar-ket highs and lows, it has done a very, very good job of pointing investorsto the most probable, logical, and best times for the stock market to rallyor decline.
The ensuing years have given me much to think about as I have studiedthe markets and economic cycles. As an example, the stock market deba-cles  we  saw  in  the  latter  part  of  the  twentieth  century  occurred  in  synchwith what Gaubis and Smith wrote; stocks got slammed in 1987, as well as1989. And of course, the one no one will ever forget: 1999 was the top forthe Nasdaq’s high-ﬂying stocks and the beginning of a 76 percent correc-tion in high-tech issues.—a correction that wiped out many individual in-vestors, professionals, and mutual funds.
Was it possible that the decennial pattern identiﬁed, at least in part, theeconomic  up-and-down  swings  from  1962  forward?  It  is  an  interestingquestion, one I will address in this book and one I think, after you see thedata,  you  will  agree  presents  a  superb  buying  opportunity  for  2002  and2005. I am deeply indebted to Gaubis and Smith for starting my journeyon  the  path  of  looking  for  stock  market  cycles.  Unlike  many  students  ofmarket cycles, though, quite frankly I don’t place much value on most ofthem. For sure, I do not think they are precise. Most market cycles, such asthe 18-day cycle, 200-day cycle, and all that, are at best difﬁcult to trade oruse to invest. Yet there are several very dominant cycles that seem to holdwater, and more importantly, hold up in the future. That’s what much ofthis book is about.
Additionally,  I’d  like  to  share  with  you  some  methods,  ideas,  andtechniques of investing I have discovered and found to be successful forthe average investor. These are easy to use and easy to follow. They canand do get to the heart and truth of the markets. It does not matter whata  company  does  in  terms  of  its  product  or  service  nearly  as  much  aswhether  the  company  is  proﬁtable  and  what  its  growth  prospects  are.
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page xi
PREFACE
xi
That  was  a  problem  with  the  roaring  bull  market  of  high-tech  stocks:Fundamentally  they  were  not  sound,  so  while  stories  carried  them  tosome amazing price levels, they couldn’t maintain those levels. That theywould crash was inevitable.
What I hope to show you is that fundamentals have moved stocks inthe  past  and  will  move  stocks  in  the  future,  regardless  of  what  the  com-pany does. Ultimately, it always gets down the fundamentals; it always getsdown to value. As the great baseball manager Tommy Lasorda said, “Godmay delay but God does not deny.” In this business of speculating, value inthe form of growth and proﬁtability may indeed be overlooked for a while,but ultimately it prevails.
In 1982, I wrote a book called How to Prosper in the Coming GoodYears. It was a refutation of the negativity the purveyors of pessimism hadspread across the country at that time. I took an outrageously bullish pos-ture on the future for two reasons. First, Ronald Reagan and supply-sideeconomics  were  coming  on  the  scene.  My  study  of  the  past  showed  thatevery time we had such incentive-based economic programs and incentive-oriented economic systems, the markets always went higher.
On top of this was one simple fact that had been hanging in the cob-webs  of  my  mind  since  1962:  Years  ending  in  two  usually  produced  thestart of bull markets . . . years ending in twos usually produced overall eco-nomic  up  terms.  So  this  book  is  very  much  a  continuation  of  that  1982book. The greatness of our economic system lies in front of us, not behindus. It is not all over; the good times are coming now as they will continuein the future. This book aims to help you pinpoint when those times aremost 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 butin the tomorrows in today’s be-here-now world.
LARRY WILLIAMS
Rancho Santa Fe, CaliforniaFebruary 2003
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page xii
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page xiii
THE RIGHT STOCKAT THE RIGHT TIME
CCC-Williams FM (i-xii).qxp 5/24/03 10:34 AM Page xiv
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 1
1
THE 10-YEAR PATTERN IN THEUNITED 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 fortune-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 bestbuy points over the next 10 years. That’s quite a claim. Can it be done, andif so how?
I’d like to ﬁrst catch your attention with this: If one were to look forthe best buying points of the twentieth century one could not help but no-tice that these stellar opportunities came in 1903, 1912, 1913, and 1920into 1923. The ultimate best buy point came in 1932. This was followedby  wonderful  buy  points  in  1942,  1952,  and  1962;  1972  wasn’t  bad(though  1973  was  better),  and,  of  course,  1982  was  perhaps  the  secondbest buy point of the twentieth century. That was followed by another su-perb buy point in 1992. Notice that for the past 100 years, these ideal buy-ing points came in years ending with a two or a three.
If you had invested in just these years you would have substantially out-performed  the  investor  who  chose  to  continually  buy  stocks.  I  ﬁnd  thisrather amazing and, better yet, to be hard evidence that indeed there’s some-thing going on in the U.S. stock market—something that shows us when the
1
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 2
2
THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET
best buying opportunities tend to occur. They are usually to be found in theﬁrst part of the decade—namely, years ending in twos and threes.
Figures  1.1  through  1.6  are  of  historic  stock  market  activity  and  arewell worth your study. The ﬁrst, the Axe-Houghton index of stock marketaverages from 1854 until 1935, is from my personal ﬁles. The next groupof ﬁgures, from Moore Research Centers, Inc., shows price activity for the101 years from 1900 to 2001.
THE PAST IS THE FUTURE
The 1800s were no different from the 1900s; they presented a very similarscenario. Stocks roared in 1862 and 1872; 1883 was very close to a won-derful buy point, which came in early 1884. Along came 1893, which pre-sented another good buying opportunity. I do not mean to imply that allone has to do as an investor is buy stocks every 10 years. I wish it were thateasy! But it certainly helps to have a concept and time zone of when onewants to make a major play in the stock market. My concept of this is thatyears ending in twos and threes are most likely to turn out to be gargan-tuan buying points. It is almost as simple as that.
THE ROAD MAP TO MARKET SUCCESS
As a very young man, I followed the work of Edson Gould, who publishedan advisory service called “Finding and Forecasts.” How I wish I had paidmore attention to what Edson had to say. While it is true he had many ar-cane forms of forecasting, he consistently relied on the action of the Fed-eral Reserve Board and what he called the 10-year pattern for stock prices.Although  I  did  not  know  it  at  the  time,  I’d  been  handed,  ﬁgurativelyspeaking, the keys to the kingdom of stock market forecasting. The irony ofthe situation is that I spent the next seven years trying to determine how toforecast stock market prices out into the future. I studied the works of W. D.Gann as well as those of R. N. Elliott, several leading astrologers, and so on,which all turned out to be a waste of time. I was fortunate enough to eventu-ally  meet  Gann’s  son,  who  was  a  broker  in  New  York  City  and  who  ex-plained to me that his father was simply a chartist. He asked why, if his dadwas good as everyone said, the son was still “smiling and dialing,” calling upcustomers  to  trade.”  It  seemed  he  was  somewhat  disturbed  by  his  father’s
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 3
THE ROAD MAP TO MARKET SUCCESS
3
Figure 1.1 Market Averages from 1854 to 1935Source: Axe-Houghton.
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 4
4
THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET
Figure 1.2 Dow Jones Industrial Average, 1900–1925Source: Moore Research Center, Inc.
Figure 1.3 Dow Jones Industrial Average, 1920–1945Source: Moore Research Center, Inc.
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 5
THE ROAD MAP TO MARKET SUCCESS
5
Figure 1.4 Dow Jones Industrial Average, 1940–1965Source: Moore Research Center, Inc.
Figure 1.5 Dow Jones Industrial Average, 1960–1985Source: Moore Research Center, Inc.
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 6
6
THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET
Figure 1.6 Dow Jones Industrial Average, 1980–2001Source: Moore Research Center, Inc.
press-agentry,  as  it  had  led  many  people  to  come  to  him  seeking  the  holygrail. If there was one, it was never passed on to the son.
At that same time I also met F. B. Thatcher, who had been Gann’s pro-moter  and  advance  man.  He  assured  me  in  correspondence  over  the  lastﬁve years of his life that in fact Gann was just a good promoter, not neces-sarily  a  good  stock  trader.  F.B.  made  his  own  predictions,  and  they  werenot bad, but certainly not great.
He did give me his version of the genesis of the legend of Gann as agreat forecaster. It all began, he told me, with an article in the Ticker andInvestment Digest that has been reprinted many times since, where it wasreported  that  Gann  sold  wheat  at  the  high  tick,  or  price,  of  the  day.Thatcher said they simply hired a good press agent to place the story in amagazine for them. The magazine article placement was accomplished overa dinner where there was some pretty serious drinking as well some moneysliding under the table, along with payment for a large ad in the magazine.I did not know any of this at the time I began my search for somethingto predict the future. Like everyone else, I believed what I had read aboutall the great predictors. I wish now I had just stayed with the forecastingtechniques that Gould devised. His techniques have been not only more ac-curate than Gann’s but also a heck of a lot simpler to follow.
Figure  1.7  is  just  as  presented  by  Gould  as  well  as  shown  in  Yale
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 7
THE ROAD MAP TO MARKET SUCCESS
7
Figure 1.7 Ten-Year Patterns of Industrial Stock PricesSources: 1881–1917, Cowles Commission Industrials; 1918–1969, Standard & Poors’s425 Industrial Stock Price Index.Reprinted from Yale Hirsch, Don’t Sell Stocks on Monday.
Hirsch’s  book,  Don’t  Sell  Stocks  on  Monday (Facts  on  File  Publications,1986). The bottom line of the chart traces the average of eight decades ofmarket history from 1881 to 1960.
Gould  had  taken  the  time  to  average,  by  hand,  stock  prices  from1881 through 1960 on a monthly basis. In this day and age, we can dothat  in  almost  the  blink  of  an  eye  with  a  computer.  I’m  certain  it  tookGould a good year of work. Essentially, what he did was to average everymonth from 1881 forward through 1960. By this I mean he compared allJanuary  price  movements  in  those  80  years  to  all  other  Januarys.  Thiscreated a pattern that Gould used as a general road map that he expectedthe stock market to follow. What is fascinating is that while his work wascompleted in 1960, the roaring bull market of the 1960s ﬁt the patternalmost to a T. Then along came the sluggish 1970s, and again the mar-kets  moved  pretty  much  in  accordance  with  the  road  map.  The  1980sseemed to an almost uncanny extent to follow the road map Gould hadcharted out for us, with the crash of 1987 coming exactly where Gould’sforecasts said it would occur. The tremendous buying point of late 1987
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 8
8
THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET
and early 1988 also was represented on the chart he made in 1960. I ﬁndthat most remarkable.
Even more startling is that the end of the Nasdaq run-up in the waningweeks of the twentieth century also came in the tenth year of the decade,where Gould postulated market tops are most likely to be found.
The chart shown here reﬂects Gould’s work using the Cowles Commis-sion  Industrials  from  1881  to  1917;  that  stock  market  index  was  thenblended into the Standard & Poor’s index from 1918 to 1969. As you cansee, his work suggests that the ﬁrst year of a decade, such as 1981, 1991, and2001, presents investors with choppy to down markets. Sometimes marketstake off in years ended in two, such as 1982 or 1932; and for sure by thetime the third year rolls around, such as 1983 or 1993, a bull market begins.I would suggest you place this road map of prices in your safe-deposit box togive your children instead of an inheritance. It has more value, and I don’tthink the value will deﬂate over the coming inﬂationary time periods.
Figure  1.8,  thanks  to  Moore  Research,  shows  what  we  call  “out-of-sample” data. This means the chart reﬂects information not in the originaltime under study. In short, an idea or conclusion is reached from observingone time period; then the thesis is applied to data from another time, eitherbefore or after the test or discovery period. Seldom does the idea work onthe out-of-sample information, by the way.
Figure 1.8 Dow Jones Industrial Average Decennial Pattern, 1900–1999Source: Moore Research Center, Inc.
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 9
THE ROAD MAP TO MARKET SUCCESS
9
In this case we averaged the 1980s and the 1990s to continue the sameprocedure used by Gould on the earlier data. The pattern holds, telling usthere is consistency to the concept. What we see is that in the card game ofthe 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 andstrategies I have developed in some 40 years of trading, the vast majorityperform at about 40 percent efﬁciency after the test. In other words, oneshould not expect a repeat performance very often. The reality is that oncea system or technique is run on unknown data, seldom does it hold up orcome even close to what the original study showed.
In  the  summer  of  2001,  when  I  began  writing  this  book,  it  seemedfairly clear to me that I was looking at a road map that pointed to sometype of buying point coming in the mid to latter part of 2002 as well as inlate 2003. In lectures across the United States I told investors what I saw asa rare opportunity to buy stocks.
Figure  1.9  shows  what  happened  after  Gould’s  chart  was  published:The pattern of stock prices for 1881 to 1960 continued. Figure 1.7 has al-ready shown that the roaring bull market of the 1950s and 1960s ﬁt thepattern  quite  closely,  and  Figure  1.8  superimposed  the  1980s  as  well  as1990s over the basic forecast made some 40 years ago.
Figure 1.9 Dow Jones Industrial Average Decennial Pattern, 1970–1999Source: Moore Research Center, Inc.
CCC-Williams 1 (1-66).qxp 4/24/03 6:53 AM Page 10
10
THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET
It does not matter whether you have been following the markets for30 years or 30 minutes; you can see that there is more than “just an in-teresting pattern” at work here. Far from it; what you are looking at isthe ultimate insight as to the road stock prices are most apt to follow. In-deed,  for  over  150  years  there  has  been  a  consistent  ebb  and  ﬂow  ofstock  prices  based  on  the  start  and  ﬁnish  of  each  decade.  Note,  this  isnot  a  10-year  pattern;  its  basis  is  the  beginning  and  ending  of  eachdecade. To that extent, 10 years of data are observed, but it is not a 10-year cycle.
As  a  longtime  observer  of  market  activity  I  can  tell  you  there  isnothing  on  the  face  of  this  planet  that  has  a  better  record  of  giving us  the  general  time  periods  to  be  bullish  and  bearish  than  the  way stock prices have on average carved an upward course each decade in asteady fashion.
THE “PHENOMENAL FIVE” YEARS
I  have  learned  a  lot  about  the  markets  from  my  longtime  good  friendYale Hirsch (all he learned from me was how to catch trout). Yale hasalso  uncovered  a  second  important  point  within  this  overall  pattern  ofprice swings. Yale pointed out in his book Don’t Sell Stocks on Mondaythat the middle year of this 10-year pattern