A Legend Sees a Bottom

I have been fortunate over the years to develop a wonderful network of friends and associates who have a much deeper understanding of economics and the markets than I. When the markets get crazy -- as they have in recent week -- I find it helpful to call on these folks and pick their brains about the situation. I am well aware that developing a myopic, dogmatic view of the markets is a fantastic way to get carried out of the arena on my proverbial shield.

One market observer and trader whose advice and thoughts I have come to deeply appreciate in recent years is Larry Williams. Among his other accomplishments, Larry predicted the bull market of the 1980s and '90s in his 1982 book, How to Prosper in the Coming Good Years, and in 1987 he won the Robbins World Cup Trading Championship, turning $10,000 into over a $1 million. Amazingly, 10 years later, his 16-year-old daughter used her father's ideas and insights to win the same competition with a gain of 1,000%. He has written numerous books on futures and stocks and was among the first to take a serious look at the Commitment of Traders report and its predictive characteristics.

Larry has been around the markets for a long time, and his views are worth listening to, particularly in these turbulent times. I caught up with him this week from his new digs in Australia, and with his permission, I'll share his current views with you.

According to Larry, the markets should bottom very soon. Larry uses a rather unique combination of seasonal patterns and long-term cycles, and he thinks that the last week of March will mark an important market bottom for stock prices. Although this runs counter to my own view of the market, it gives me pause, because I still have in my email inbox a note from Larry from July 27 warning that stock prices had topped and were likely to fall precipitously.

He does caution, however, that "the Commitment of Traders report still shows a large percentage of small speculators holding long positions, a condition not associated with bottoms." Perhaps some of the current financial sector drama will set up the type of panic selloff that washes them out and gives the stock market the conditions to needs to rally.

Looking ahead, Larry says, "My seasonal and cyclical work suggest the probability of a significant selloff in September of this year that would create an additional buying opportunity before prices resume their upward move." He discounts most of the current economic data; he believes that stocks are a leading indicator, not a lagging one, and that stock prices will begin to advance long before the actual recovery begins. As he told me, "The last thing I would ever use to predict stock prices is the economy, since it tends to lag the market so badly."

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Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.