Benzinga's Exclusive Interview with Tom DeMark of Market Studies

Tom DeMark, developer of the world-renowned DeMark Indicators, answers some questions for Benzinga readers. The DeMark Indicators are among the most widely-used market timing tools out there, and have a strong presence on Bloomberg, CQG, Thomson-Reuters and more. DeMark has been a student of the stock market for over forty years, and he boasts a clear and strong record of success. He recently launched DeMark Prime, which allows investors to utilize the timing tools of his firm,

, in a convenient and effective manner.

By nature, most traders and investors are trend followers. Buying begets more buying and selling begets more selling. The widely held adage “the trend is your friend” is espoused by most in the investment business. We have chosen to add a corollary to this belief: “…unless the trend is about to end.” After college, graduate school of business and law school 40 years ago, I was fortunate to have been hired by the fastest growing investment service in the country. I quickly learned that given the billions of dollars we had to commit to the market and then had to sell, we had to anticipate trends before they developed. In other words, we had to buy into weakness and sell into strength. The trading tools we developed were specifically designed to identify likely price zones of both downside and upside trend exhaustion. After a market bottom or top was recorded it was too late for us to enter the market as the competition from trend followers would exaggerate the trend and we would have to sacrifice price opportunities.

There is a large stable of market timing indicators that I have created over the past 4 decades. At the time I entered the investment industry there was a dearth of timing tools. Fundamentals were relied upon by most traders with the exception of a few sentiment indicators that measured the dealings of professional investors, such as New York Stock Exchange specialists who facilitated transactions on the exchange floor versus the trading of the public and exchange members. Another relationship that was monitored was odd lot short sales and the followers of this ratio equated odd lot buying or selling with the unsophisticated retail trader and their trading patterns served as alerts as to what the market was likely to behave. Specifically, aggressive odd lot selling was indicative of a likely pending upside reversal while intense odd lot buying was a precursor to a likely pending downside reversal. These sentiment analyses together with conventional moving averages and trend lines were all that was available at that time. Fortunately, I had the luxury of an unlimited research budget and had the time to invest in creating my own indicators. The basis of all these indicators is grounded in the belief and logic that markets bottom not because of astute buyers identifying a low; rather the bottom is formed because the last seller has sold figuratively speaking. Conversely, a market tops because the last buyer figuratively speaking has bought and the market subsequently declines of its own weight, or at least moves sideways. Fundamentals dictate long term market moves while the intermediate and short-term moves are dictated more by trader psychology. The indicators I have developed have been tested for years and have been successful in identifying the market’s rhythm and inflection points. These indicators are scalable and the fractals can be identified on monthly, weekly, daily and intraday — down to one minute — charts. The synchronization of the time periods reinforces the expectations.

Obviously, it is widely accepted belief that it is impossible to time the market and instead investors should merely buy and hold long term. If this were truly the case, why are hedge funds and proprietary brokerage trading desks so successful and profitable? Granted, if one invests/trades part time it is difficult to time the market. However, a professional full-time trader has access to timing tools and devices as well as experience to time these market turns. Besides, were this inability to time the markets truly the case, the services of consultants such as myself would not be in the demand that it is. I have been fortunate to have worked with the best timers in the market. The investment firm I was associated with in the 1970’s was an expert in market timing and was one of the most successful fund managers. In the 1980’s, I was the Executive Vice President of Tudor Investment, the number one hedge fund during that period. Also, I served as advisor to Soros and Steinhardt Advisors, two of the largest hedge funds during that period. Over the past 16 years, I have served as special consultant to Steve Cohen, the founder of SAC Capital, the best trader in the market ever. The indicators I have developed are the most widely accessed research tool on the Bloomberg network, and they also have a presence on Thomson-Reuters and most recently a ‘proprietary’ service called DeMark Prime. The demand for these indicators are at an all-time high and, were it not for their validity, the widespread usage by professional traders would not exist.

Some advisors have created and promoted various techniques that are specifically designed for specific markets in deference to other markets. In other words, they have optimized their research to price-fit specific markets historically. Optimization models have proven to be ineffective and have little or no predictive capability. We were convinced that our models were effective as they applied to all markets the same way, regardless of time period followed. In fact, up until 1981 we applied our market timing models only to daily and weekly charts, as there was no intraday charting source. Once ADP Comtrend offered its service we were able to apply to finer time periods than daily, such as hourly, 30 minute, 10 minute and even 1 minute. What we learned was that regardless of fractal the efficacy was the same. What proved to be even more compelling was that not until 1982, when Kansas City Value Line and SP futures contracts began being traded, we had no idea that the indicators would be applicable to intraday charts. What we found was groundbreaking, as the indicators proved to be effective over the intraday intervals as well.

Not unsurprisingly, the October 2007 high was correctly identified by the market timing models just as the subsequent March 2009 low. Although this timing was exceptional, it is not uncommon with the indicators. In fact, the indicators’ consistency of identifying trend exhaustion levels has been responsible for the growth of usage by Bloomberg users to more than 35,000. In fact, as a lark we started a chat room on Bloomberg with a handful of indicator users and within a year there were over 18,000 chat room subscribers. For perspective purposes, the next most popular chat room was less than 300 and the third largest was less than 50. We were Bloomberg chat room pioneers and the size of our audience was a testament to the value the users worldwide attached to the market timing models.

Nothing has changed in the market timing models, their application, or interpretation. They proved effective in the most rigorous laboratory conditions conceivable—real time, once a generation market decline. However the importance of discipline and and money management cannot be stressed enough as even applying the most effective timing tools requires these other skills to be successful.

In my career I have always been labeled a maverick. I was schooled in fundamental and received “C’ and “F” designations of the CFA (Chartered Financial Analyst) exams but failed to take the final exam for the complete certification. This was intentional, as I am not a pure fundamentalist. At the same time, I was one of the first members of the Market Technicians Association (

) outside New York City. However, I withdrew, as I am not a technician. I am a hybrid — partially fundamental and partially technical. I refer to my work as “market timing.” I have always been fascinated with original research and since there was a void as far as market timing research I took it upon myself to create my own research team. Fortunately, CQG was willing to provide me with programmers and other resources for software development. Shortly afterwards, the first of my three books was written and it became a best seller. A number of notable people in the industry wrote testimonials to all books. One in particular, Mike Bloomberg, realized there was a need within the Bloomberg community for my type of research and the indicators became the only service imbedded within Bloomberg that was not owned by Bloomberg. Market Studies was the company that provided the indicators. Since that time other vendors besides CQG and Bloomberg, such as Thomson-Reuters, have included the proprietary timing indicators. In fact we have our own charting and indicator service, DeMark Prime, that is being offered currently and the response to this service has been enormous. In fact, the success of the indicators was so compelling that Steve Cohen from SAC, the best trader in market history, as well as John Burbank from Passport Capital, the number one investment firm in 2007 became shareholders in Market Studies last year. Currently, we have a diverse staff of personnel and everything is being run by my son TJ DeMark. He is doing an exceptional job.

Markets are cyclical for sure, and we believe our market models are sufficiently sensitive to identify the unfolding of these price movements. Unlike many cyclical followers of the markets, we believe that cycles constructed based solely upon a calendar (number of days) are not helpful to traders as some trading days have no impact on a cycle. Our models distinguish between those days that have relevance and those that don’t. The interrelationship between opens, highs, lows, and closes are critical while the significance of merely a day’s trading often is not.

I believe the impact of all conceivable market factors are translated into price movement. Consequently, we monitor basic Economics 101, which is supply and demand. The bottom line of all research, analysis, suppositions, forecasts and expectations are translated into price. Lip service and complex sophisticated modeling mean nothing until traders and investors actually place orders to buy or to sell. We are parasites in the sense that we let others do the heavy lifting of research and we merely measure the intensity of the buying or selling with our proprietary market timing models.

Volatility is good for those of us who try to identify trading inflection levels. The more volatility there is the greater the potential reward. In fact high volatility is once again an example of the value of the timing tools we employ. Trading is not a hobby or a part time job. It requires the same determination and dedication that an athlete devotes to honing his skills. It is not easy but the rewards are unlike any other profession. You are operating against the best minds in the world and the satisfaction of having correct market forecasts is much deeper than the success of being rich rather it is knowing that you have successfully outmaneuvered others who may be much smarter.

The investment business is one industry the government has not as of yet handcuffed with onerous legislation. The upside is only limited by one’s imagination and willingness to learn and experience. The advantage people nowadays have is computer software and technology. When I first began in the industry, high tech was a proportional divider, a Bowmar calculator, and a Texas Instruments 57. Everything was done manually. Charts were interpreted by inspection, as were price relationships. Nowadays calculations and comparisons that required hours or even days can be done in fractions of a second. So while the sophistication of technology has helped analysis, the competitive nature of the business has been enhanced as well. Regardless it requires the same amount of creativity and ingenuity and a good portion of luck to be successful.

What I believe or feel is going to happen or may happen is secondary to what the market itself tells me. I let price action tell me what to expect. It is the sum total of all the greatest research and strategic minds that make the forecasts and my models merely prey upon their beliefs that placed into price action. In fact there are times when the perception of events is more important than the actual event itself occurring that dictates price movement. In other words, regardless what may actually take place, the belief that it will dictates the direction of prices. Applying our timing tools, ours is not to question why but merely to determine when and how much.

I have witnessed the advent of option exchange trading back in 1973, financial futures trading beginning in the 1970’s, energy futures in the 1980’s, portfolio insurance in the 1980’s, index trading and on and on. Derivative trading is merely another aspect of the same type of market fad. Once again since the bottom line of all expectations appears in price we only monitor price movement.

We don’t make recommendations and let the indicators speak for themselves.

We have found that concentrating upon that which we do best and making it better is the best company philosophy. We do not try to be something other than what we are which is the best market timing company internationally. Trying to do too much merely distracts us form our goals. We are constantly kept abreast of what is happening in our industry. We try to associate with those individuals and companies who are considered investment pioneers and that explains the partnership we forged with SAC and Passport Capital, two of the most successful investment firms. Their owners have guided us according to their specific needs and we have offered some of their unique vision and perspective to our many clients through our market timing tools.

You can learn more about Tom DeMark, the DeMark Indicators and his new service, DeMark Prime, at the

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