Anyone tempted to gamble on buying the proverbial dip in Chinese equities after Monday’s dramatic 8.5% sell-off probably shouldn’t, says Tom DeMark, who called a top and shortly thereafter, a bottom in the SHCOMP back in 2013.
Even after Monday’s rout, the index could fall another 14% DeMark figures, noting that "you just cannot manipulate the market."
Actually, you certainly can manipulate the market, as the Fed and the HFT crowd have vividly demonstrated, although the Chinese experience is admittedly a bit different. As we’ve argued repeatedly, the retail investors who have at times accounted for over three quarters of daily volume in China have now adopted a "sell the rip" mentality after watching their life savings vaporized in the space of three short weeks, which means that Beijing’s plunge protection efforts are met everywhere and always with immediate selling pressure.
But the failure to manipulate won’t be for lack of trying in China, and that means the dips are met with some manner of "good news", be it a statement of support, a ban on selling, fabricated GDP data, or outright central bank plunge protection. This simply won’t work, DeMark warns. "Markets bottom on bad news, not good news. You want to have the last seller sell. We got good news at the recent low. The rally is artificial."
Here’s more on DeMark’s take from Bloomberg [7]:
Chinese stocks will decline by an additional 14 percent over the next three weeks as the market demonstrates a trading pattern that mirrors the U.S. crash in 1929, according to Tom DeMark.
The Shanghai Composite Index will sink to 3,200 after plunging 8.5 percent Monday to 3,725.56 in the worst selloff in eight years, DeMark, who predicted the gauge’s bottom in 2013, said on Monday. That would extend its decline since a June 12 peak to 38 percent. The index’s moves since March are tracking those of the Dow Jones Industrial Average in 1929 when the gauge lost as much as 48 percent, he said in a phone interview.
"The die has been cast," said DeMark, 68, the founder of DeMark Analytics in Scottsdale, Arizona, who has spent more than 40 years developing indicators to identify market turning points. "You just cannot manipulate the market. Fundamentals dictate markets."
DeMark said the euphoria and panic in the Chinese market resembled that in the U.S. market in the late 1920s. The Dow Jones Industrial Average climbed for five straight years in the run-up to the crash of 1929, adding more than 200 percent. It peaked in September 1929 before plummeting almost 50 percent in less than three months.
DeMark said he’ll reassess the market once the Shanghai index hits 3,200, which would almost wipe out this year’s gain. If that level, which is around the 61.8 percent Fibonacci retracement from the June peak, fails to hold, the market could "unravel" quickly, he said.
While some investors are concerned that the benchmark has gotten unhinged from the real value of stocks due to government intervention, DeMark said his indicators work best to pick up buy and sell signals when the market is "manipulated." That is because intervention makes the imbalance in the supply and demand of stocks "more apparent" and easier to identify, he said.
The bottom line: don't go bargain shopping for stocks in China, because as we've been saying for at least four weeks, the extraordinary air of desperation surrounding Beijing's intervention efforts has served only to exacerbate the panic and although it's not wise to bet against a central bank, it might be even more dangerous to bet against millions of angry housewives determined to cash out.
