In a world where fundamentals no longer matter to the market, there is still some hope that at least the voodoo that is “chart analysis” perhaps works. If so, the best source of forecasting the future by looking at the past is the man who an icon among technicians: Tom DeMark. And with good reason: while it could certainly could have been a lucky guess, in March, DeMark whose D-Wave strategy is a favorite of such trading legends as Steve Cohen, predicted that a market bottom was forming on the day the S&P 500 ended a 34% plunge (although his projection for the index to drop below 2,100 was off, as the bottom – so far – was 2,191.86, and his call for an 11% rally followed by a range trading proved too conservative).
So what does DeMark think will happen next? According to Bloomberg, the famous technician sees the rally accelerating from here, and according to his D-Wave forecast the S&P will climb to 3,486 – a new all time high – in the next few weeks as the rally that has gripped the tech sector spills over to the broader market. As a reminder, since the end of Q1, all of the market upside has been thanks to just 10 mega-cap stocks. The other 490 stocks in the S&P500 have gone nowhere as shown in the chart below.
DeMark’s target is 7% higher from the current levels and would be 100 points above the all-time high reached in February.
“The catch-up will be fast,” DeMark told Bloomberg, adding that “it’s going to catch people off guard”, although one look at the overnight moves, DeMark should probably have been talking about gold and silver which are exploding at this moment.
As Bloomberg notes, the prediction was based on DeMark’s “countdown” study that involves comparing a security’s closing price to its highest or lowest levels two days earlier. Cycles of “exhaustion” develop when a pattern continues 13 times. The S&P 500 just produced its sixth count Monday and the Nasdaq 100 was on count 12.
Looking at the recent surge in stocks, DeMark notes that while Monday’s advance was led by tech darlings, Tuesday resumed a recent trend in which investors seek out laggards, a process of widening market participation that to DeMark usually coincides with the final phase of a rally. Last week, in a rare inversion of the trend observed since the March 23 low, the Nasdaq 100 fell for the first time in three weeks while the S&P 500 advanced, bolstered by industrial and commodity shares.
DeMark was less optimistic on the Nasdaq which has soared 19% YTD and is hitting daily record highs: “The Nasdaq is going to struggle,” DeMark said. “It may wait for the S&P 500 to record its high” before a meaningful selloff.
And there you have it: that said, if DeMark is indicative of the other trends that dominate this bizarro, insane “market” the best trade here may be to fade everything the famed technician is recommending and just go long the Nasdaq while shorting everything else. After all, that’s the trade that has become synonymous with central bank takeover of capital markets, and there is nothing that suggests this creeping Sovietization of “markets” will ever end.