DeMark Sees ‘Capitulation’ When S&P 500 Falls Below 1,100

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The Standard & Poor’s 500 Index may drop as low as 1,076 before investor panic abates and stocks rally, according to Tom DeMark, the creator of indicators for identifying turning points in securities.

The benchmark index for U.S. equities may fall that far intraday as early as next week and then gain as much as 20 percent, DeMark said in a telephone interview from Phoenix today. The swings will push the VIX, as the Chicago Board Options Exchange Volatility Index is known, above the high of 48 it reached on Aug. 8, he said.

“We’re trying to identify when selling capitulation is about to be completed,” said DeMark, the founder of Market Studies LLC. “We’re trying to identify the inflection point on the downside when the last seller sold. It could come as early as next Thursday.”

The S&P 500 slumped 3.2 percent to 1,129.56 at 4 p.m. New York time, extending its weekly loss to 7.1 percent, on concern policy makers are running out of tools to avoid another global recession. The VIX jumped 11 percent to 41.35 as investors drove up prices for insurance against equity losses.

Between April 29 and Aug. 8, the S&P 500 fell 18 percent on a closing basis amid concern Europe’s debt crisis is spreading and the U.S. economy may slip into a recession. The S&P 500 yesterday had its biggest drop in a month after the Federal Reserve said the turmoil caused by Europe’s crisis is taking a toll on the economy and it plans to buy long-term debt and sell shorter maturities to sustain the economic recovery.

‘Pull a Rabbit’

“Clearly the equity market had very high hopes for the Fed to pull a rabbit out of its hat, which didn’t happen,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, wrote in an e-mail. His firm oversees $550 billion. “Capitulation will take the market to last summer’s lows,” he said. The S&P 500 hit 1010.91, the 2010 intraday low, on July 1.

DeMark, who has spent more than 40 years developing indicators with names like “sequential” and “countdown,” said during an interview on Aug. 16 that U.S. stocks would reach new lows within weeks, setting the stage for a rally that would push the S&P 500 above its 2011 highs. The slump in stocks came later than anticipated, making it unlikely for the market to reach new highs, he said today.

“The time that lapsed has dissipated some of the impetus that would have existed had the break below the August 9th low occurred within one to two weeks, and now it is almost seven to eight weeks later,” he wrote in an e-mail.

39% Plunge

During the Aug. 16 interview, DeMark said Societe Generale SA and BNP Paribas SA “look like buys.” The Paris-based banks have both tumbled 39 percent since then.

Ryan Larson, head of U.S. equity trading at RBC Global Asset Management Inc., said investors may start panicking should the S&P 500 fail to hold 1,101.54, this year’s intraday low reached on Aug. 9.

“When panic sets in, investors first sell what isn’t working, then they sell what is working to lock in profits, then they will sell everything they can get their hands on,” Larson wrote in an e-mail from Chicago. “Many thought we had seen capitulation the week of August 8. But with the uncertainties building, both domestically and abroad, we think capitulation has yet to be seen.”

While markets are driven by the economy, prices move in patterns and traders can use them to identify when to buy and sell, according to DeMark, an adviser to Steven A. Cohen’s SAC Capital Advisors LP who provided consulting to hedge funds including George Soros’s Soros Fund Management LLC and Leon Cooperman’s Omega Advisors Inc. The market will rebound after setting new lows, he said.

“When the last seller sold, it’s almost by default the market will levitate because there will be a vacuum,” he said. “There will be no sellers and the market can move up quickly.”

(Adds to ninth paragraph that DeMark recommended buying Societe Generale and BNP Paribas before they plunged.)
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