“Markets bottom on bad news, not good news,” he said. “You want to have the last seller sell. We got good news at the recent low. The rally is artificial.”
Previous Predictions
DeMark predicted in February 2013 that the Shanghai Composite would retreat, one day before the index began an almost 20 percent tumble from a nine-month high. Four months later, his call for a bottom in Chinese stocks proved prescient as the gauge hit a four-year low within days and started rising. By early August 2014, DeMark forecast that the Shanghai Composite would fall after rallying about 10 percent from the June low. Instead, the benchmark kept rising, surging more than 130 percent through mid-June.
DeMark said the euphoria and panic in the Chinese market resembled that in the U.S. market in the late 1920s. The Dow Jones Industrial Average climbed for five straight years in the run-up to the crash of 1929, adding more than 200 percent. It peaked in September 1929 before plummeting almost 50 percent in less than three months.
Fibonacci Level
DeMark said he’ll reassess the market once the Shanghai index hits 3,200, which would almost wipe out this year’s gain. If that level, which is around the 61.8 percent Fibonacci retracement from the June peak, fails to hold, the market could “unravel” quickly, he said. Some technical analysts use Fibonacci ratios, based on proportions found in nature, to predict stock market levels.
While some investors are concerned that the benchmark has gotten unhinged from the real value of stocks due to government intervention, DeMark said his indicators work best to pick up buy and sell signals when the market is “manipulated.” That is because intervention makes the imbalance in the supply and demand of stocks “more apparent” and easier to identify, he said.
“Lip service and intervention like that -- it’s false,” DeMark said. “There’s a certain way in which the market unfolds. The only thing the government could do is to postpone it.”
DeMark has provided consulting to hedge funds including George Soros’s Soros Fund Management and Leon Cooperman’s Omega Advisors. His company makes money by charging traders for access to its indicators. It also sells subscriptions to the indicators on the Bloomberg Professional service.