The Shanghai Composite Index will retreat about 8 percent before resuming gains as the surge in Chinese stocks has exhausted buyers, according to Tom DeMark, the creator of indicators to show turning points in securities.
The gauge of domestic Chinese equities will fall to within a range of 2,230 to 2,250 after generating a sell signal on a Combo chart that’s designed to identify market tops and lows, said DeMark, who correctly called the market’s bottom last year. The Shanghai index dropped 0.7 percent to 2,418.53 at the close, after climbing 24 percent from an almost four-year low reached in December.
“The current uptrend will likely take a breath before an anticipated resumption of the rally,” DeMark said by e-mail. “It has been a rally of which many were initially skeptical and was characterized by much fear and trepidation at the low, and currently the sentiment has reversed and become positive.”
Chinese stocks have been climbing amid signs the recovery in the world’s second-largest economy is gaining traction. Growth in gross domestic product accelerated in the final three months of last year for the first time in two years, while data this month showed manufacturing expanded in January and services industries grew at a faster pace.
The Hang Seng China Enterprises Index of shares traded in Hong Kong slid 1.2 percent to 11,701.75, poised for its lowest close since Dec. 31.
DeMark, who has spent more than 40 years developing market-timing indicators, said Dec. 4 that the Shanghai Composite’s decline below 1,960 signaled selling has climaxed and that the gauge will climb 48 percent within nine months. The same day, the index touched 1,949.46, the lowest intraday price since January 2009.
DeMark’s Combo indicator completed “13 countdown” on a daily basis for the Shanghai gauge yesterday. In general, DeMark’s “countdown” study involves comparing a security or index’s closing price to its highest or lowest levels two periods earlier, with cycles of “exhaustion” forming when a pattern continues 13 times.
The rally in Chinese stocks will continue amid an improving global economic outlook and “positive” earnings revisions, Raymond Ma, manager of the China Consumer Fund at FIL Ltd., which is known as Fidelity Worldwide Investment, wrote in an e-mail today. His fund has returned 17 percent in the past 12 months, beating 82 percent of peers, according to data compiled by Bloomberg.
An adviser to Steven A. Cohen’s SAC Capital Advisors LP, DeMark predicted in 2011 that the Standard & Poor’s 500 Index’s retreat would stop at 1,076. The index bottomed at 1,074.77 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 U.S. presidential elections didn’t come true.
The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. rose 0.1 percent to 97.79 yesterday. The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., dropped 0.4 percent to $40.46 in New York, the lowest level this year. The S&P 500 Index closed little changed at 1,512.12.
DeMark provided consulting to hedge funds including George Soros’s Soros Fund Management LLC and Leon Cooperman’s Omega Advisors Inc.
His company, Market Studies LLC, 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.