The Shanghai Composite Index (SHCOMP) will rally 48 percent within nine months after its decline below 1,960 signaled selling has climaxed, according to Tom DeMark, the creator of indicators to show turning points in securities.
The benchmark index for Chinese equities will advance to 2,900 after its decline produced a buy signal on the Sequential and Combo charts, designed to identify market tops and bottoms, said DeMark, who has spent more than 40 years developing market- timing indicators. The Shanghai index rose 0.8 percent to 1,975.14 at today’s close after earlier falling to the lowest level since January 2009. It’s down 10 percent in 2012.
“Everyone is negative on SHCOMP index, absolutely everyone,” DeMark wrote in an e-mail, referring to the Chinese benchmark gauge’s ticker symbol. “And now is the perfect environment to make a low and be positive as the last seller, figuratively speaking, has sold.”
China is headed for its slowest economic growth in more than a decade as the central bank tightened monetary policies in 2010 and 2011 to tame inflation. The People’s Bank of China raised its benchmark interest rate five times during the last two years before cutting twice in 2012. The economy is projected to grow 7.7 percent this year, the slowest since 1999, according to median estimate of 49 economists surveyed by Bloomberg.
Both DeMark’s Sequential and Combo indicators completed “13 countdown” on a daily basis for the Shanghai index last month. In general, DeMark’s “countdown” study involves comparing a security’s closing price to its highest or lowest levels two periods earlier, with cycles of “exhaustion” forming when a pattern continues 13 times.
On the weekly basis, the Combo indicator finished “13 countdown” in September while the Sequential chart formed a “12 countdown” last week.
“I believe SHCOMP index made a low and should have a very strong rally for a number of months,” DeMark wrote.
DeMark, an adviser to Steven A. Cohen’s SAC Capital Advisors LP, predicted last year that the Standard & Poor’s 500 Index’s retreat would stop at 1,076. The index bottomed at 1,074.77 on Oct. 4, 2011. His Oct. 24 call for the S&P 500 to make a “solo move” and rally 5 percent to about 1,480 around the presidential elections didn’t come true. The index hasn’t gone above 1,428.39 on a closing basis since the forecast.
DeMark provided consulting to hedge funds including George Soros’s Soros Fund Management LLC and Leon Cooperman’s Omega Advisors Inc. Market Studies makes money by charging traders for access to its indicators. It also sells subscriptions to the indicators on the Bloomberg Professional service for $500 a month. Bloomberg LP, the parent of Bloomberg News, takes a percentage. DeMark has a similar arrangement with Thomson Reuters Corp. DeMark won’t say how many subscribers he has.
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