DeMark Sees ‘Big Risk’ That Chinese Stocks Will Fall Further

  • Decline to come if markets open lower and remain low at close
  • DeMark correctly predicted last year's selloff and rebound

DeMark on China, U.S. Stocks

Chinese stocks trading in Hong Kong may extend their worst start to a year since 1995, according to Thomas DeMark, who correctly predicted the selloff in the country’s equity market last year.

“It’s critical tomorrow,” DeMark, founder of DeMark Analytics, said on Bloomberg Television on Monday in New York. “We are going to have a big risk on the downside” if the Hang Seng China Enterprises Index opens lower and trades below Monday’s intraday low, he said.

Thomas DeMark. Photographer: Andrew Harrer/Bloomberg

Thomas DeMark. Photographer: Andrew Harrer/Bloomberg

If those conditions are met, the gauge will decline to 7,933, DeMark said in a follow-up phone interview. That would be about a 15 percent decline from Monday’s closing level. The direction of the market will be inconclusive if the conditions are unfulfilled, said DeMark, who has spent more than 40 years developing indicators to identify market turning points.

The Hang Seng gauge dropped 1 percent to 9,223.01 at the close after falling as much as 1.9 percent in intraday trading on Tuesday. That’s below the gauge’s intraday low of 9,235.59 on Monday.

The measure slid 3.6 percent on the first trading day of this year on Monday after a decline on the CSI 300 Index triggered a circuit breaker on the mainland benchmark that halted transactions in more than $7 trillion of local equities, futures and options. The selloff started as data showed manufacturing contracted for a fifth straight month and investors speculated that the end of a ban on share sales by major stakeholders may come as soon as this week.

DeMark, 68, has made several successful calls on Chinese stocks in recent years.

Correct Forecast

He correctly predicted on July 27 that the Shanghai Composite Index,  the benchmark for the mainland stocks, would fall 14 percent to 3,200. In an interview in September, he said the Hang Seng China Enterprises Index, which tracks mainland stocks in Hong Kong, would rebound 9 percent to 10,900. The index rose to within about 1 percent of that target in October.

Goldman Sachs Group Inc. said it’s too early to turn bullish on China stocks as the first-day drop suggests equities will probably post declines in the first quarter, according to a note published Tuesday.

Previous Calls

DeMark was wrong in August 2014 when he 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 Monday that the Shanghai Composite is sending such a mixed signal that he cannot make a prediction at the moment.

Demark has advised hedge funds including George Soros’s Soros Fund Management and Leon Cooperman’s Omega Advisors. His Scottsdale, Arizona-based 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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