Tom DeMark Relies 100% on Market Timing

Trader and consultant Tom DeMark has invented dozens of proprietary technical indicators over the years and relies strictly on the technical principles of market timing for his research and trading. In fact at one point in his career, DeMark went through the CFA program (certified financial analyst), but chose to never complete it. "Markets over the long term are controlled by fundamentals. But, my indicators measure psychology--that's what technical analysis does," DeMark explained.

DeMark's first step into the financial world came after graduate school in both business and law, when he joined National Investment Service, based in Milwaukee, Wisconsin, as a fundamental analyst in the early 1970s. The firm managed roughly $300 million in pension and profit-sharing assets, investing in primarily fixed-income securities and equities.

National Investment Service's strength was market timing. But DeMark said of his first job, "I was a professional gofer .. I was low man in the company, but I ascended quickly because I was good at market timing."

"My goal was to be involved with a small group of people who were progressive," DeMark said. The firm "avoided the stock market crash in 1973 and 1974," and assets under management grew to $6 billion.

"1974 was severe ... (The Dow Jones Industrial Average) went from over 1000 to 570 during the political crisis with Nixon. There was a 50% decline in the stock market," DeMark remembered. However, the firm avoided that debacle through market timing. "They just gave me a license to do whatever I wanted to do," he said.

"I went off on my own and traded commodities. My bosses didn't mind if I diversified for my own account," DeMark said. In general, DeMark believes "the commodity side (of the business) has the more creative people-because the leverage involved is so big."

In 1978, DeMark set up a financial markets consulting division within National Investment Service. "We had a Who's Who in the industry list of clients," DeMark noted. "I diversified, supplying stock and fixed-income commodity timing ... the profitability of the subsidiary was greater than the parent," DeMark said.

However, in 1982, DeMark broke away and continued his consulting. "I had $120 billion in assets collectively following my bond calls," DeMark said. Just ahead of the U.S. stock market crash in 1987, one of DeMark's indicators posted an equity sell signal. Shortly thereafter, he joined Paul Tudor Jones's firm for a stint as an executive vice president and continued his market research and systems development there.

Regarding the basis of his research, DeMark said, "market timing is 100%. It's anti-trend, it's contratrend, it's pattern recognition and price exhaustion." DeMark believes his technical indicators differ from others because "they are totally objective and mechanical and they are against the grain of most technicians."

One of DeMark's well-known technical indicators, which he has trademarked Sequendal--"is a cyclical approach to market analysis, determinant on the market itself," DeMark explained. "People who work with cycles generally take slices of time and make them equal. I'm saying that some trading days in the market are irrelevant. I try to mark comparisons with price activity and activity of days ago," he added.

In a year-long series in Futures magazine, beginning in August 1995, DeMark authored articles outlining many of his technical indicators, which readers can refer to for more in-depth details. DeMark also authored a book entitled The New Science of Technical Analysis, published by John Wiley & Sons, Inc. in 1994.

DeMark is putting the finishing touches on a book called New Market Timing Techniques: Innovative Studies on Market Rhythm and Price Exhaustion, which he expects to be published in the spring of 1997 "I'll be releasing 20 new indicators. Four of them were some I traded while I was at Tudor-plus the ones I created with Larry Williams," DeMark said.

When asked if there are some markets DeMark prefers over others, DeMark responded in the negative. "Everything I've done has application to all markets," he explained.

"I try to address every aspect of technical analysis and leave some of the variables open so people can research on their own," DeMark said. Nonetheless, his indicators are "99% mechanical, objective and simplistic," he added. However, DeMark admits there is more to successful trading than just good indicators or system. "Money management and discipline are more important than the system," he said. In fact "good discipline, a knowledge of their (personal) limitations and good money management are more critical than the system or indicator," DeMark said.

Advice DeMark has for beginning traders? "Read a lot. Test a lot. Don't trade until you've done your homework. Make certain you've made your technique objective-it should be a definitive process," DeMark concluded.