In his daily note, well-known floor trader Art Cashin muses on Wednesday’s big decline and the possible impact of the big call from Tom DeMark that stocks were due for a top, which we mentioned yesterday morning.
Did The Selloff Have Just A Touch Of Wizardry In It? – In Wednesday’s Comments, we noted that a respected technical analyst, Tom DeMark, had received a signal that the stock market may be ready for a pullback of over 10%. DeMark and that signal were the topic of a lot of buzz on the floor yesterday.
Let’s look at some key points from the Bloomberg article:
U.S. stocks are within a week of “a significant market top” that is likely to precede a drop of at least 11 per cent in the Standard & Poor’s 500 Index, said Tom DeMark, creator of a set of market-timing indicators.
DeMark’s Sequential and Combo indicators, designed to identify market tops and bottoms, are giving a sell signal on the main U.S. stock benchmark for the first time since mid-2007, he said in a telephone interview. The S&P 500 began its 57 per cent plunge from a record in October 2007.
“I’m pretty confident that in one to two weeks, the market will be in a descent,” said DeMark, founder and chief executive officer of Market Studies LLC. “It could be pretty sharp.”
So, we see that the last time this indicator gave a “sell signal: was in the middle of 2007, a bit early for the October high, but a very timely call nevertheless.
At bit later in the article, they discuss the last time the indicator gave a “buy signal”:
The indicators are based on comparisons of the current closing level of the index with closing and intraday levels over previous periods. The reading Jan. 14 was the first signal of a reversal in the S&P 500 since March 2009, when the indicators showed a rebound was imminent, he said. That month the S&P 500 fell to a 12-year low from which it has rebounded more than 90 per cent.
So, the indicator gave a “sell signal” within a few months of the bull market high and a subsequent “buy signal” at the panic bottom. That seemed like stunningly good timing. The timing prompted a lot of the floor chatter.
Traders then speculated that a signal with such a prescient history might prompt folks to take some profits, or, at least, cut back on buying.
Thus, Wednesday’s weakness may have had just a touch of wizardry in it. Not quite the Joe Granville effect, but a little influence nonetheless.
We hope to chat with a couple of Mr. DeMark’s clients and maybe flesh out the performance bit more.
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