Chinese stocks will decline by about 14 percent over the next three weeks as the market demonstrates a trading pattern that mirrors the U.S. crash in 1929, according to Tom DeMark, who predicted the bottom of the Shanghai Composite Index in 2013.
The Shanghai Composite Index will sink to 3,200 after plunging 8.5 percent Monday to 3,725.56 in the worst selloff in eight years, DeMark said. That would extend its decline since a June 12 peak to 38 percent. The index’s moves since March are tracking those of the Dow Jones Industrial Average in 1929 when the gauge lost as much as 48 percent, he said in a phone interview on Monday.
Chinese stocks resumed their declines this week after the government’s market-boosting efforts, including a selling ban on major shareholders, helped halt a rout that wiped out $4 trillion in market value in less than a month. While the securities regulator denied speculation that policy makers are withdrawing their support, concern is mounting that the unprecedented intervention to prop up share prices may not be sustainable as the economy slows.
“The die has been cast,” said DeMark, 68, the founder of DeMark Analytics in Scottsdale, Arizona, who has spent more than 40 years developing indicators to identify market turning points. “You just cannot manipulate the market. Fundamentals dictate markets.”
He made similar statements in February 2014 about the Standard & Poor’s 500 Index, saying that if certain conditions were met, U.S. stocks had reached a point resembling the time before the 1929 market crash. The S&P 500 rallied 8 percent over the next two months. He said Monday that those conditions didn’t materialize at the time.
The Shanghai gauge had rebounded 16 percent from its July 8 low through Friday as officials went to extreme lengths to support stocks. Officials allowed more than 1,400 companies to halt trading, suspended initial public offerings and supplied China Securities Finance Corp., a state-run financing vehicle with more than $480 billion to intervene in markets.
The benchmark index dropped 1.7 percent at the close on Tuesday. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF rose 0.8 percent at 10:07 a.m. in New York after tumbling 9.2 percent Monday.
China Securities Finance hasn’t pulled support for equities and the government will “continue efforts to stabilize market and investor sentiment,” China Securities Regulatory Commission spokesman Zhang Xiaojun said in a statement after the close of trading Monday.
DeMark said the intervention won’t be able to sustain the recent rally.
“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.”
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.
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.
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