DeMark Says S&P 500 May ‘Trap’ Bulls After Rally

By Nikolaj Gammeltoft and Adam Johnson - Oct 26, 2011 2:47 AM GMT+0700

The Standard & Poor’s 500 Index may climb above its close yesterday before starting a retreat in the next three weeks that will “trap” bulls, said Tom DeMark, the creator of indicators to show turning points in securities.

After the decline that began today ends just above 1,200, the benchmark gauge for U.S. equities may rally about 5 percent and begin a process that would signal another drop, DeMark said. The index’s peak will come in November after it closes higher on four to six successive days, he said.

“The market is going to build a trap, and many of the people who are bullish are going to be trapped,” DeMark said in an interview today on Bloomberg Television’s “Street Smart” hosted by Lisa Murphy and Adam Johnson. “It’s going to be tired and disappoint everyone.”

The S&P 500 fell 1.9 percent to 1,230.63 as of 3:45 p.m. New York time, after rallying 3.7 percent over three days.

DeMark said on Oct. 18 that the S&P 500 would climb to 1,254 before reversing and falling more than 5 percent. The index closed at 1,254.19 yesterday. His prediction last month that a decrease in the index that started Sept. 16 would end at 1,076 proved prescient when the gauge bottomed at 1,074.77.

‘Labored’ Upside

After it falls to about 1,206, the S&P 500’s “next move is going to be labored and it could take two to three weeks,” DeMark said. “It’s going to be selective rotational and trying on most traders. We don’t see the money being made that we did see off the October low.”

The S&P 500 advanced from the threshold of a bear market early in October on steps by European leaders to support banks and higher-than-estimated corporate earnings. The benchmark gauge rallied 11 percent in October through yesterday, following a five-month decline.

“There’s not that much more upside in the market,” DeMark said in a telephone interview yesterday after the close of regular trading. “The market top is going to be when we’ve had four or five days of successively higher closes on the S&P 500 from today’s close,” he said. “If that happens then we go down very hard.”

DeMark, an adviser to Steven A. Cohen’s SAC Capital Advisors LP, provided consulting to hedge funds including George Soros’s Soros Fund Management LLC and Leon Cooperman’s Omega Advisors Inc.

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net