Focus on Stocks: October 2023
First & Foremost
I want to personally thank you for subscribing to "Focus on Stocks". I will do all I can to earn the confidence you have placed in me. -- Larry Williams
Is it a Different World?
"I have to pay attention to the implications of the great disruptions that are going to take place because the world will be radically different in five years... the next election, the debt situation, all of those things are going to change. And then with the new technologies... it's going to be like a time warp. It's a different world."
Is Ray right? He's worth over $15 billion, after all (yes, that's a B).
Many, many years ago, I knew Ray. He was kind enough to let me bunk at his place as our careers were beginning. I have not seen him since we both went our separate ways.
But I think he's wrong in terms of market timing. So I'd like to share with you this month what I think I know about the future. This recalls Bob Dylan's line "I know what only dead men know" from his song "Back Pages". I'll change that to, "I know what billionaires don't know."
Here's My Proof...
The charts you are about to study show a major stock market cycle that I read about in 1964. These charts show the cycle out of sample from 2000-2023.
The question is, "Has this consistently forecast major market buying areas, and has it suggested times of market weakness or slowing in trend?"
The world certainly is not the same one that it was in 1964. It has changed over the years. We've gone off the Gold Standard. Newspapers are essentially dead. Amazon killed retail, and we now all live on our cellphones. Here, look at Chart 1. You decide.
Sure looks to me like that despite all the changes in society, this cycle has done an admirable job of alerting us to major market moves, years in advance. So, sure, Ray is right. There will be changes we probably can't envision at this time. Yet, as I see it, the markets will continue to dance to the same music or driving cyclical force.
Chart 3 is this simple cycle projection out to 2026, a general path stocks and the economy should follow. Study the past to understand the future.
Unemployment is Up, and That's a Problem.
Here, we see there has been an upturn recently in the unemployment data. Not good, not good at all. Almost all recessions start that way.
The reason for the recent upturn is due to the Fed's incessant interest rate hikes. Their relentless, perhaps reckless drive to lower inflation has stolen jobs from hard-working people. Even a quick perusal of the Chart 4 shows the relationship to recessions, the grey vertical lines. Is this telling us a recession is to soon unfold? Maybe so, and for sure you are going to see pundits and prophets drag this out to support the bearish case.
As Paul Harvey would say, "And now here's the rest of the story ..."
Chart 4 shows the thousands of people out of work for economic reasons. Should we not, however, put those thousands into some sort of reference? How about the number of employed as a percent of the total population? I think that is a better way of looking at the data. It is the percentage of people getting/losing jobs that seems the most relevant.
Of those numbers I prefer to see the ratio of employed. There are several reasons people may not work. If the percentage of people working is increasing, the economy is healthy. The St Louis FED has the data in a hard-to-find chart that looks at unemployment that way. Here's the chart:
Ah! There is a difference. We do see the same relationship to recessions, as well as the times marked in yellow. That is when the index had a slight dip, but no recession followed. More importantly, look at the data now... there is no downturn as we saw in the raw number. Looking at it this way, which I think is better, there is no alert to a recession.
For Doubting Thomases, next up is a blowup of the data since 2016. The trend is still up. So we can breathe a little better, but still need to monitor this data.
Business is Getting Better
Don't take it from me that business is doing well. Instead, feast your eyes on the current business conditions, in blue, and the expectations from business people (Chart 7).
The index of future business conditions (expectations) rose six points to 26.3. This is its highest level in more than a year, suggesting that firms have become more optimistic about future conditions. New orders and shipments are expected to increase significantly in the months ahead, and employment is expected to grow.
Participants from a variety of industries responded to a questionnaire and reported the change in a variety of indicators from the previous month. Respondents also stated the likely direction of these same indicators six months ahead. The track record of expectations predicting the current conditions is excellent; hence my view that business is and will be getting better.
Here's the twist for you... this data is the outlook for the state of New York, one of the not-so-easy-to-do-business states.
A Question from Our Online Meeting
As you may recall from our last live meeting, I was asked, but could not answer (at that moment) what the current lead/lag time is for the impact Crude Oil has on stock prices. Chart 8 holds the answer.
The red line is the price of Crude Oil extended 155 weeks into the future. Is it causation or correlation?
Good question, and I'm not certain we can know for sure. Yet we can for sure draw some conclusions. It appears stocks, for the last 5 years, have followed the price pattern of crude oil some 3 years later. The "fit" of the two markets is just too good for me to ignore... as a tool, not a "be-all" indicator. I hear another click in the bull market tumbler.
The forecast is for higher prices, as we see with my cycle studies, yet from a very different perspective.
...Now to the markets.
The Best Trade in October...
Back in the 1990s, I did real-time trading seminars where I traded $1,000,000 during the seminar and gave attendees 20% of the profits. Those were exciting times.
Several subscribers to this letter attended and will recall we always held a seminar in late October. There was a reason for that. Stocks have a great propensity to rally at that time... and still do. I'll explain with the next chart.
Chart 9 shows what would have happened in the last 25 years if we were to buy on the X trading day left in the month of October. A large stop loss of $2,800 per contract was the best. The optimal trade, in grey, was to buy on the night session opening of the 3rd trading day left in the month. The computer test holds the position for 6 trading sessions, then exits on the first profitable night session opening.
When I get trades like this, I get so flooded with emails that I do not respond to. The rules are the rules. Personally, I seldom follow them blindly. As we get into that time frame, I look for what I think is the best spot to enter the trade. The 3rd trading day left in the month is October 27th.
Chart 10 is how the trade lines up with my True Seasonal Pattern in StockCharts.com software.
Historically, prices have found support in early October, and then blasted off at the month-end. Does it always pan out this way? No, still no 100% trades. But as Chart 9 shows, this trade has 80% accuracy. I like the odds; this is our trade of the month.
Wealth is Not Health
Since no one has objected, yet, I will continue my monthly comment on longevity, something I have been studying and putting into practice for 50 years. I have found some things helpful, lots of scams and dead ends. The effort has paid off. At 81, I can still produce a market letter, or so I think... and this summer I set 6 new age group records in the Montana State Games and Senior Olympics track & field events.
One of the more interesting longevity approaches is Carbon-60. In at least one test, this doubled the life span of mice.I have tried the mixture of Olive Oil and C60, a molecule made up of 60 carbon atoms. The taste was horrible; I would rather die early than have daily doses of the stuff. Allegedly it acts as an anti-oxidant, a free radical scavenger. The flavor may have been improved now; I see Amazon reviews are mixed. Early on, it was very expensive, close to $200 a month. Now the price varies, but is in the $30 a month range.
Much cheaper and perhaps better is taking activated charcoal capsules. We all know charcoal is a marvelous remover of toxins. The World Health Organization has approved it for emergency use for overdose problems. Vets use it if your dog or cat ingests poison. One study by the Russian gerontologist, Dr. Frolkis, fed activated charcoal to elderly rats and saw a 34% increase in their life span vs the control group.
Does this carry over to human? No research has been done as there is no money in it... a year's supply is just a couple of dollars. If you think, as I do, that an accumulation of toxins might slow us down, then it makes sense to take a few capsules for 5 to 6 days a few times each year. That's what I have been doing.
Keep in mind I have no medical training... this is just one man's experiment to live longer and healthier.
Long-Term Market Timing
As I see it, we remain in a bull market. I expect we will into 2025. There are only two positions to have in a bull market: long or neutral. At this time, I am long. Forget the fearmongers. Do not let them get you off the bullish path.
Intermediate-Term Market Timing
Based on my cycle studies, the recent decline is about over, and a rally is to begin.
The bottom line is we have seen a pullback in a long-term bull market. It's time to rally. Nothing else to be said.
Individual Stocks
When to get in...
There are many parts to successful speculation, but it usually gets down to finding the right stock, then buying it at the right time. Hopefully, I can help narrow down the universe of some 6,000+ stocks traded in the USA to a select few.
Timing is then up to you, the trader. My favorite short-term timing tool is WillTrend, which is in my StockCharts plugin. I'm showing it in Chart 12 on Target (TGT), a stock which, I think, may be in a turnaround situation. This means TGT is on the front burner... but this is not a license to just jump in. I like to "jump in" when price trend has confirmed the trend has turned up.
There are many ways to determine that. Surely you have a few of your own. I like my WillTrend stop, as it closely models the short-term trend of a stock and often will hold for major moves. In Chart 12, we can see how well it has responded to trend with only 4 "signals" or trend changes in the last 7 months.
My ideal entry is to wait for price to get above WillTrend, then buy on the first short-term pullback.
If you don't have this tool, consider using trend lines, which are the simplest way of identifying when there has been a change in trend. In Chart 13, there was a clear trend line break to the upside in September, and immediately an uprising trend line was broken. This told us the trend was once again back to the downside. (My trend line tool is shown here in light green/blue).
You could also use Wilders Parabolic or a volatility stop; I still prefer my WillTrend, but then I like my children better than the neighbors'.
There are many trend change tools. My point is, I don't jump into a stock because I say it looks good or some talking head on TV likes it. Wait until the trend is positive.
Strong Stocks
My bull market strategy is very simple; in a bull market, buy the strongest stocks. We can identify the "strongest" with my comparative strength approach. I outlined it in last month's Focus on Stocks. I have screened through all of the recent most active and hot stocks. Here are the ones that have held up the best on the recent decline.
Just look; while the averages retested the August lows, these stocks did not. This tells us they are in strong hands and have the best probabilities of producing substantial gains in the future.
The strongest stocks have been Tesla Inc (TSLA), Meta Platforms Inc. (META), Alphabet Inc. Class C (GOOG), and Crowdstrike Holdings Inc. (CRWD). While all the popular averages dipped back to the lows seen in August, these stocks did not get banged with that much selling pressure. They withstood some crunching body blows and kept standing.
These are the stocks to focus on as the year-end rally begins to shape up. Here are their cycle projections.
Two Special Situations
There are two more stocks the intrigue me. The first is International Business Machines Corporation, simply known as IBM. This is due to its recent amazing strength, and the fact that it continues to flirt with making new highs while the overall market has been declining.
The other is American Airlines Group Inc (AAL). Yes, it's been as weak as the overall market, but this is the 6th time it has traded in this price range and has always seen a bounce.
My Accumulation Index is in the buy zone, while my cycle projection looks like this:
That's it for this month. Just a couple housekeeping items:
Our online Family Meeting will be held October 19th at Noon Eastern in the US!
To all my fellow commodity traders, please keep in mind this letter is about stocks, not futures. I may, on very rare occasions mention them but here, we talk about stocks.
And... Coming Next Month
"Buy an Index and stay fully invested." That's what Buffett and a host of others say works best. Does it? Yes. Can it be improved upon? Oh, yes and in two very big ways. I will explain next month as we take a look at Mutual Funds and ETFs as well.
Until then ...
Good Luck and Good Trading,
Larry Williams
If you have questions for Larry that you'd like addressed in future postings, please email familygathering@stockcharts.com.
