[00:00] Has the Chinese stock market ever been more important? Whether you agree with the reasons, China has been leading global equities on their rockiest ride in years. The Shanghai Composite reported its biggest two-month tumble since 2009.
[00:15] However, late overnight, the index reversed direction and paired losses. Is this a meaningful reversal? Does it point to something in the future? Strategist Tom DeMark is founder and CEO of DeMark Analytics. He predicted this month's sell-off and is followed by smart money investors, including Steve Cohen, Lee Cooperman.
[00:32] He's with us from Scottsdale, Arizona. Tom, thank you very much. What do you see in China right now? What we see in China is a continued flowing decline in the market.
[00:45] On June 12th, when the market was at $51.77, we predicted a decline that would take us down to $31.98. we had projected downside and it was pretty much in track with the decline in 1929.
[00:59] Once the market... When you say 1929 of course you're referring to the U.S stock market crash in 29. Yes yeah we've got a lot of publicity we did we received a lot of publicity on the forecast but the publicity didn't really build in the crescendo until possibly maybe about six seven weeks ago
[01:17] people did pay no attention to the forecast and it was made June you know June 12th and subsequently but as the market declined I guess the psychology changed and people became more interested something akin to what we experienced the January 15th high in 2014 we followed the
[01:33] market downside we thought it could develop into something similar to 1929 but it was a long shot and we got a lot of publicity and people didn't pay any attention to the follow-up which is that the market had to meet certain preconditions
[01:45] in the market reverse upside. There are preconditions into the low at 3200 and the market just didn't meet the requirements we were looking for. So we going to see continued erosion We should see the low of last week 2580 undercut We can get it I mean 2050 Yeah we should see 2590 probably before this market bottoms
[02:06] Now what do you mean 1980, I'm sorry what? Go ahead, go ahead, we're going to finish this off. Well in 1987 off the August 25th peak, the market declined into the October 20th, well that big crash everyone labeled as the second coming in 1929.
[02:21] the market declined exactly 38.2% which is Fibonacci number off the peak and it did the same thing if you take the March 12 high in 2000 and you project it out to the low on
[02:36] September 21, 2001 it was exactly 38.2% in 94.75 both of those declines were 38% rounding off and a 38 percent decline for the shanghai market was 3200 we breached that low last week
[02:51] but there were certain preconditions that had to appear and they appear today even though there's a marginal decline a few points the opening was very important see what's happened in that chinese decline particularly in the last couple months there's been a lot of interference there's been
[03:05] an influential force meaning the chinese government markets bottom markets bottom when the last buyer figuratively speaking has bought and markets top when the last seller is sold. It's totally opposite what most people believe. Most people believe there's a
[03:19] there's a group or a quarter of people at the bottom who are very bright and move the market upside. Those are called short those are that's called short covering and it's short-lived and what it does the market seem to rally up
[03:32] the bottom particularly when there's three up closes from similar price patterns it tells you that it's short covering and there's a vacuum under the market and the market accelerates to the downside again. And that's what's happened to the Chinese market on the way down. But currently, like I said, we're in the bottoming area. Instead of the 38%
[03:48] decline we currently as of last week 45 But in 1929 when the stock market did crash it took 49 days to crash into the October 3rd low or November 3rd low The market declined 50
[04:03] We're not quite there. Tom, doesn't the unpredictability of irrational actors like the Chinese government, and when I say irrational, I mean that the Chinese government isn't buying itself or ordering others to buy on the basis of value
[04:17] or even on the basis of technicals. Doesn't it wreak havoc with the kind of technical analysis that you do? We really don't do conventional technical analysis. Our type of analysis is more mathematically based, and it's more anticipatory.
[04:31] We identify areas of trend exhaustion, whereas technicians are trend followers. So it's not really the same. We're characterized sometimes inappropriately.
[04:43] We look at when the supply and demand balance is out of whack, And that's what it was at the June 12th peak in China and similarly at the stock market in the U.S. It was out of whack, and now it's adjusting.
[04:55] And it takes a while, especially when, particularly when weekly and monthly analysis that we run or analyses that we run is overbought at a peak or is indicating trend exhaustion in the upside.
[05:07] And that's what happened. There was a confluence of a number of time periods. You've just got to work it off. The acceleration of the downside now is slowing. with Shanghai and any complacency being built and for the first time we're seeing the government in China is outside the market.
[05:23] They're not, we don't see it right now that they're trying to influence the bottom. That just doesn't happen. Before we run out of time, can you draw a connection between what you see in China and what's happening in U.S. stocks right now?
[05:35] Well, last week we characterized the decline that we experienced, the two big down days. So that's something akin to what the May 10, 2010 decline with the flash crash.
[05:47] And when we look back in 2010, was the market to rally? It took about three four five days to rally But once the market exceeded the high of the flash crash day it was exhausted That similar to what happened last week in the U market The market closed above last Monday high which was a gap downside
[06:04] and also closed above the prior Friday's close. And that led to exhaustion. And we should see the market drip lower for the next month or so. And we could probably make a new low, the low last week's low,
[06:17] before the market finally bottoms. that's similar to what happened in 1967 in other words on the S&P 500. Yes. How much lower? Particularly I don't know we have to assess it if it's a long drawn-out process the decline won't be as severe
[06:31] but the market does decline sharply now it could become more severe we did see indications at the low last week that the Russell the small cap and mid cap did put in pretty good bottoms as
[06:43] the Dow Jones average but the S&P and the Nasdaq did not so we can see intraday decline probably below those broad market indices into the next decline and maybe the S&P and the Nasdaq 100 making new closing lows and
[07:00] seeing some weakness there so you'll see a divergence and that's typical what you see at market trading point. And Tom quickly before we go what do you need to see before you come to the conclusion that US stocks are headed for another
[07:12] rally? Time, we need time and what happened last week is just reflexive that's all and it just takes time and like I said if the market should decline
[07:24] faster than we expect you probably make a bottom quicker but we're getting into that period of the year when the market is susceptible to market decline September and October. All right Tom we'll end it there if you don't mind Tom
[07:37] DeMark is founder and CEO of DeMark Analytics we could keep talking Tom but I'm afraid I'm the one who has to go. You can read more about Tom's analysis on Bloomberg.com. Up next, Netflix's Wild Ride, the biggest gainer in the S&P 500,
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