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Chinese stocks will decline an additional 14 per cent through the next three weeks, as the market demonstrates a trading pattern that mimics that of the US crash in 1929, according to Tom DeMark, who predicted the bottom of the Shanghai Composite Index in 2013.
The benchmark for mainland stocks would sink to 3,200, after plunging 8.5 per cent to 3725.56 on Monday, the worst sell-off in eight years, DeMark said on Monday. That would extend its decline since a June 12 peak to 38 per cent. The gauge's moves since March were tracking those of the Dow Jones Industrial Average in 1929, when it lost as much as 48 per cent, he said.
Monday's sell-off came 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 policymakers were withdrawing their support, concern is mounting that the unprecedented intervention to prop share prices might not be sustainable, as the economy slows.
"The die has been cast," said DeMark, founder of DeMark Analytics in Scottsdale, Arizona, and who has spent about 40 years developing indicators to identify market turning points. "You just cannot manipulate the market. Fundamentals dictate markets."
Government support
In February 2014, he made similar statements about the Standard & Poor's 500 Index, saying if certain conditions were met, US stocks would reach a point resembling the time before the 1929 market crash. The S&P 500 rallied eight per cent over the next two months. On Monday, he said those conditions didn't materialise at the time.
The Shanghai gauge had rebounded 16 per cent from its July 8 low through Friday, as officials went to extreme lengths to support stocks. Officials allowed about 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.
Chinese stocks...
China Securities Finance hasn't pulled support for equities and the government will "continue efforts to stabilise market and investor sentiment", China Securities Regulatory Commission spokesman Zhang Xiaojun said in a statement at the close of trading on Monday. DeMark said the intervention wouldn't be able to sustain the recent rally.
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"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." In February 2013, DeMark predicted the Shanghai Composite would retreat, a day before the index began an almost 20 per cent 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 the Shanghai Composite would fall, after rallying about 10 per cent from the June low. Instead, it kept rising, surging about 130 per cent through mid-June. DeMark said the euphoria and panic in the Chinese market resembled that in the US market in the late 1920s. The Dow Jones Industrial Average climbed for five straight years in the run-up to the crash of 1929, gaining about 200 per cent. It peaked in September 1929, before plummeting about 50 per cent in less than three months.
DeMark said he'd reassess the market once the Shanghai index hit 3,200, which would almost wipe out this year's gain. If that level, the 61.8 per cent Fibonacci retracement from the June peak, failed 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 the benchmark has been unhinged from the real value of stocks due to government intervention, DeMark said his indicators worked best to pick up 'buy' and 'sell' signals when the market was "manipulated".
That was because intervention made 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 indicators on the Bloomberg Professional service.
