DeMark Says Sell China Stocks Now After World’s Best Gain

By Weiyi Lim  

Photographer: Tomohiro Ohsumi/Bloomberg

A security firm in Shanghai, China.

The Shanghai Composite Index (SHCOMP) will probably end its world-beating rally within days and fall about 10 percent, said Tom DeMark, the developer of market-timing indicators who predicted the gauge’s peak last year.
China’s benchmark equity index, which has surged 9.9 percent since June 19 to 2,223.33, is poised to erase those gains and drop below this year’s intraday low of 1,974.38, DeMark wrote in an e-mailed response to questions from Bloomberg News. He said the losses may occur over about six months.
“Selling into strength now is recommended,” 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. “The trend is your friend until the trend is about to end.”
DeMark’s prediction in February 2013 that the Shanghai Composite would retreat came a day before the index began an almost 20 percent tumble from a nine-month high of 2,434.48. The measure of China’s $3.5 trillion stock market has outperformed equity indexes in 46 emerging and developed
countries in the past six weeks as signs of monetary easing, accelerated government spending and gains in manufacturing spurred speculation the nation’s economic growth will pick up.

Photographer: Andrew Harrer/Bloomberg

Tom DeMark, founder of DeMark Analytics LLC.

DeMark’s view puts him at odds with Standard Chartered Plc’s Erwin Sanft and Templeton Emerging Markets Group’s Mark Mobius, who say the rally will extend as low valuations lure investors and the government supports growth with stimulus.

Sell Strength

The Shanghai Composite jumped 1.7 percent yesterday to its highest level since Dec. 10. The gauge’s relative-strength index rose to 79.1, the seventh consecutive day above the 70 level that signals to some traders the rally has gone too far, too fast. The Shanghai measure dropped 0.2 percent to 2,219.78 at 10:08 a.m. local time as a private gauge of Chinese services industries fell to a record low.
A higher open today may postpone the market top for a “few days,” DeMark wrote. The time frame of subsequent losses may depend on whether the central bank takes measures to support markets, he said.
“It is always best to announce a top/bottom before it might occur so one is able to sell strength or buy weakness,” DeMark wrote.
On Jan. 23, three days after the Shanghai Composite closed at its low for the year, DeMark said it would bottom within days before rallying. The gauge fell a further 0.4 percent over the next two days before gaining 5.4 percent through Feb. 19.

Previous Calls

His prediction on June 21, 2013 that the stock gauge was poised for a recovery presaged a 16 percent advance from its closing low on June 27 through mid-September. 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.
He said on Sept. 12, 2013 that 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.