Stocks at risk of 11% drop. Starting now.

Strategist who develops market-timing indicators says share prices overvalued

May 4, 2014 @ 8:23 am

U.S. stocks will fall 11% starting as soon as this week should some price patterns come true, according to Tom DeMark, the creator of indicators to show turning points in securities.

The Standard & Poor's 500 Index (SPX) will have peaked if it closes above 1,891 on one or two instances without also falling to 1,884 in intraday trading, Mr. DeMark said in an interview. He made similar statements in February, saying that if certain conditions were met, U.S. stocks had reached a point resembling the time before the 1929 market crash. The S&P 500 rallied 8% over the next two months.

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“If these price objectives are fulfilled, then I'm very confident we'll make a significant high,” said Mr. DeMark, the founder of DeMark Analytics in Scottsdale, Ariz., who has spent more than 40 years developing market-timing indicators. “These indexes could be topping very soon.”

The Dow Jones Industrial Average (INDU) will start declining if the following pattern happens: one daily close above 16,581, accompanied by an intraday high exceeding 16,661, according to Mr. DeMark.

Stocks have soared in the past five years as record corporate profits and three rounds of economic stimulus from the Federal Reserve made equities one of the best investments. The S&P 500 has risen for nearly 31 months without a decline of 10% or more, versus the average of 18 months since 1945, according to data from S&P Capital IQ strategist Sam Stovall.

STOCKS OVERVALUED

Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., said the S&P 500 will climb above 2,250 before collapsing after the next U.S. presidential election. The S&P 500 Index, currently around 1,880, is already 65% overvalued, Mr. Grantham wrote in a quarterly letter released last week.

On Friday, the S&P 500 closed down 2.54 points, or 0.13%, to 1,881.14. The Dow average slid 0.3% to 16,512.89 after reaching a record.

Some of Mr. DeMark's call have proved prescient. In September 2011, he predicted the S&P 500's retreat would stop at 1,076. The index bottomed at an intraday low of 1,074.77 in October that year.

“If we get a down close today and tomorrow we open lower and trade lower, we're probably going to unravel,” he said in a Feb. 5 interview with CNBC. Mr. DeMark said last week that call was incorrect because stocks didn't meet those conditions.

Mr. DeMark, who advised Steven A. Cohen's SAC Capital Advisors, said in October 2012 the S&P 500 would rally to 1,480. Instead the index dropped over the following two months, reaching a closing low of 1,353.33 in November 2012.

On Jan. 24, Mr. DeMark told Bloomberg News China's Shanghai Composite Index (SHCOMP) would probably bottom out within days and rally “sharply.” The gauge slipped 1% the next day before rising in six of the next seven days en route to a 5% increase over the following two weeks.

Mr. DeMark has provided consulting to hedge funds including George Soros's Soros Fund Management and Leon Cooperman's Omega Advisors Inc. His 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. Mr. DeMark has a similar arrangement with Thomson Reuters Corp.

(Bloomberg News)

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