DeMark Sees Shanghai Index Bottom Within Days After Rout

China’s Shanghai Composite Index will probably bottom out within days and begin to rebound, said Tom DeMark, the developer of market-timing indicators who predicted the measure’s rally from a four-year low in June.

The gauge may slip to as low as 1,952, or 4.4 percent below yesterday’s close, and then rally “sharply,” DeMark wrote in an e-mailed response to questions from Bloomberg News. The Shanghai Composite, which touched an intraday low of 1,984.82 on Jan. 20, lost 3.5 percent this year through yesterday.

The index “is in a bottom zone,” wrote DeMark, the founder of DeMark Analytics LLC in Scottsdale, Arizona, who has spent more than 40 years developing indicators to identify market turning points. “We have now turned constructive.”

DeMark’s June 21 prediction that the Shanghai Composite was poised for a recovery presaged a 16 percent advance from its closing low on June 27 through mid-September. The benchmark index for China’s $3.3 trillion stock market has since erased most of those gains amid signs of slowing economic growth and speculation that defaults in the nation’s shadow-banking system will increase.

The Shanghai Composite rose 0.6 percent to 2,054.39 today, while the MSCI Asia Pacific Index dropped 1.2 percent. The Chinese measure fell 0.5 percent yesterday after a gauge of manufacturing in the world’s second-largest economy trailed estimates. Industrial & Commercial Bank of China Ltd. dropped 0.9 percent in Shanghai as investors in a troubled trust product distributed by the lender met with company officials to demand their money.

Trading Accounts

Traders in China have been pulling out of the stock market. The number of equity accounts containing funds shrank to a three-year low of 53.7 million on Jan. 17, a drop of 3.6 million from the June 2011 peak, data compiled by Bloomberg show. The 30-day average value of shares changing hands in Shanghai fell to the lowest level since December 2012 yesterday.

DeMark said on Dec. 4, 2012, that the Shanghai Composite’s decline below 1,960 signaled selling had climaxed. The gauge touched an intraday low of 1,949.46 the same day before closing with a gain and advancing about 24 percent in the next two months. His Feb. 6, 2013, prediction that the index would retreat came on the same day it peaked at a nine-month high.

The Shanghai Composite climbed about 3 percent in three days after DeMark said on March 19 that the gauge would rally, then reversed those gains in two weeks. He said on Sept. 12 the measure would extend its advance to exceed 2,323. The gauge has since failed to reach the intraday high of 2,270.27 on that day.

DeMark’s company makes money by charging traders for access to its indicators. It also sells subscriptions to the indicators on the Bloomberg Professional service. Bloomberg LP, the parent of Bloomberg News, takes a percentage. DeMark has a similar arrangement with Thomson Reuters Corp.