Sentiment Is Dangerously High in One Falling Market

It's an easy trap to fall into... and a lot of investors can't help themselves.

When a market falls dramatically, they feel a desire to buy shares, hoping to nail the bottom.

After all, as the old saying goes, we want to "buy low and sell high." But buying when shares are still falling is a dangerous game to play. And it usually leads to losses.

Today, I'll share an example that's setting up right now. One market is in a downturn... Yet investors are piling in. This is a warning sign that more losses are likely in 2022.

Let me explain...

Buying right at the bottom has plenty of allure. You get to make the largest profits... And you also get the bragging rights that come with getting a big idea right.

That's the bet many investors are making right now, in Chinese stocks.

The iShares China Large-Cap Fund (FXI) holds a basket of China's largest companies. It's one of the easiest ways for U.S. investors to buy Chinese stocks.

Importantly, FXI has been falling consistently since peaking in February. It's down roughly 32% since then. But investors aren't giving up on this market.

We can see this through the total number of shares outstanding for FXI. The idea here is simple...

FXI's unique fund structure allows it to create or liquidate shares based on investor demand. If folks are bullish on Chinese blue chips, FXI creates more shares to meet demand. If investors aren't interested, the fund cuts its share count in response.

Today, shares outstanding for FXI are at a multiyear high. Demand for Chinese stocks has been increasing – even as those stocks crash. Take a look...

The share count has been rising, despite FXI's falling price. Investors are expecting the trend to turn in their favor. But that's not likely...

To see why, I looked at other times FXI's share count hit multiyear highs. This happened in 2009, 2013, 2015, and 2019.

Each peak in sentiment led to losses over the next six months and the next year. Take a look...

The worst of the downturns came in 2015. FXI fell roughly 24% in a year after shares outstanding hit a peak in bullish sentiment. But that wasn't the only big drop...

In early 2013, we saw a similar trigger. And that led to a double-digit loss over both the next six months and the next year.

Now, we can't know for certain yet if today's bullish sentiment is at a short-term peak. But it's high relative to history.

Plus, if the price drop continues, those bullish investors will start to question themselves. Then they'll head for the exits. That's when we'll want to start paying close attention...

We'll get more bullish on this market when sentiment becomes bearish and the trend turns around. But that's not happening yet...

So as we enter the new year, you want to avoid this common pitfall. And that means staying away from Chinese stocks for now.

Good investing,

Chris Igou

Further Reading

When investors are all betting in the same direction, the opposite is likely to occur. Recently, folks fled from this global market. And history shows us that was the wrong bet... Read more here: Investors Are Losing Confidence in One Country's Raging Bull Market.

"Nobody wants to buy at the peak of a rally," Chris says. But buying when an uptrend is strong is usually a smart bet. And we saw that setup recently in one commodity... Get the full story here: Oil Hits a Seven-Year High... With More Gains to Come.

Market Notes
CUSTOMERS CAN'T GET ENOUGH OF THIS FAST-FOOD POWERHOUSE

Today, we’re looking at a big-name company that succeeds by selling addictive food…

Longtime readers know we’ve highlighted the power of companies that sell products people crave, such as alcohol, video games, and sugary snacks. These businesses can be some of the safest bets for investors, since people will keep buying their goods no matter what. Today’s iconic company is a perfect example…

McDonald’s (MCD) is a $200 billion fast-food behemoth. It boasts nearly 40,000 locations in more than 100 countries. Folks around the world can’t get enough of its burgers and fries… And even as we continue to navigate the pandemic, customers are flocking to its restaurants. In the third quarter, McDonald’s posted a 14% year-over-year jump in net sales to $6.2 billion – partially driven by a nearly 13% increase in global same-store sales.

As you can see in today’s chart, MCD shares are also performing well. They’re up 150% over the past five years, including dividends… And they recently hit a fresh all-time high. As long as people keep craving burgers and fries, this fast-food giant should benefit…