The Shanghai Composite Index (SHCOMP) will jump about 12 percent in coming months as its June slump exhausts sellers, said Tom DeMark, the creator of indicators to show turning points in securities.
The benchmark index for Chinese equities will climb to 2,323 after producing a buy signal June 21 on the Combo chart, designed to identify market tops and bottoms, said DeMark, who has spent more than 40 years developing market-timing indicators. The Shanghai index fell 9.9 percent in June through last week, poised for the worst month since August 2009, while the Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. lost 6.5 percent.
“I had not received any indication of possible bottom since February until now,” DeMark wrote in an e-mail from Scottsdale, Arizona on June 21, in reference to the Combo chart. “The indication of an immediate market reversal does not exist as clearly currently and it may require a couple of days for Shanghai Composite to gain upside traction. Regardless investors should be prepared for a rally.”
While DeMark had correctly predicted in February that the Shanghai gauge would slump, he had called for a rebound in a March 19 e-mail. The gauge has fallen 10 percent since then, including a 2.1 percent drop today as of 10:28 a.m. local time.
Chinese stocks have plunged this month amid concern about a cash crunch in the nation’s interbank market, and as a preliminary reading of a manufacturing index showed output contraction worsened. The Hang Seng China Enterprises Index (HSCEI) of shares traded in Hong Kong plummeted 13 percent to a nine-month low. American depositary receipts of online retailer Vipshop Holdings Ltd. led declines on the ADR gauge last week while mobile-chip maker Spreadtrum Communications Ltd. (SPRD) surged.
DeMark’s Combo indicator completed a “13 countdown” on a daily basis for the Shanghai index. 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.
“Contrary to what most traders believe, it is ideal for a market to bottom in conjunction with negative news to exhaust a downtrend and encourage the last weak seller to capitulate,” he wrote.
The iShares FTSE China 25 Index Fund (FXI), the largest Chinese exchange-traded fund in the U.S., slipped 3.6 percent last week, while the Standard & Poor’s 500 Index dropped 2.1 percent in its second weekly slump.
Stocks on the MSCI China Index, a benchmark for Chinese companies, have tumbled 13 percent this month, sending companies to trade at the biggest discount in 20 months to their Asian peers. The MSCI China Index traded at 8.2 times estimated profit in the coming 12 months on average, a 23 percent discount to the multiple for shares in the MSCI AC Asia ex Japan Index and the widest gap since October 2011, data compiled by Bloomberg showed on June 21.
“It’s a good time to buy Chinese stocks as they look generally cheap,” Ashish Goyal, investment director at Singapore-based Eastspring Investments Ltd., which manages about $94 billion in assets in the Asia Pacific markets, said in an interview at Bloomberg’s headquarters in New York June 20. “Many of the state-owned companies are looking very cheap now and they should generally do well in the next two to three years. In the private sector, some of the consumer stocks got very expensive but they are correcting very nicely now.”
While DeMark correctly called the market’s peak this year, his prediction for an 8 percent decline in the Shanghai index proved too optimistic. The measure has tumbled 17 percent from the February high.
“I would say it’s too early to jump in,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $48 billion of assets, said in a phone interview June 21. “The underlying assumption is that China has been enjoying a strong long-term growth and that long-term trend has come into question. Until we see better clarity on central bank supervision, and better clarity on manufacturing momentum, the Chinese market is an uncertain place to be.”
DeMark, an adviser to Steven A. Cohen’s SAC Capital Advisors LP, said in December that the Shangai Composite’s decline below 1,960 signaled selling has climaxed and the index will rally 48 percent within nine months. The benchmark gauge bottomed at 1,949.46 on Dec. 4 and rallied as much as 23 percent through Feb. 6.
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.
Spreadtrum jumped 22 percent last week as a unit of Tsinghua University offered to pay $28.50 cash for each ADR, according to a statement June 21. That values Spreadtrum at 10.3 times earnings before interest, taxes, depreciation and amortization, in line with the average for acquisitions in the industry over the past decade, according to data compiled by Bloomberg.
Vipshop, a Guangzhou-based online retailer of online fashion goods, tumbled 18 percent last week to $26.49, the steepest weekly slump since March 2012. Short interest on its stock jumped a record 16 percent of its outstanding shares last week, data from Markit showed.