Sentiment is dangerously high in a declining market


It’s an easy trap to fall into … and a lot of investors can’t help it.

When a market falls dramatically, they feel the urge to buy stocks, in the hope of hitting bottom.

After all, as the old saying goes, we want to “buy low and sell high”. But buying while stocks are still falling is a dangerous game. And this usually leads to losses.

Today I’m going to share an example that is falling into place right now. A market is in recession … Yet investors are flocking. This is a warning sign that more losses are likely in 2022.

Let me explain …

Buying all the way down has a lot of appeal. You get the biggest profits … And you also get the bragging rights that come with making a great idea successful.

This is the bet that many investors are making at the moment, on Chinese equities.

The iShares China Large-Cap (FXI) fund holds a basket of the largest Chinese companies. It is one of the easiest ways for US investors to buy Chinese stocks.

It’s important to note that FXI has been falling steadily since its peak in February. It has fallen by around 32% since then. But investors are not abandoning 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 stocks based on investor demand. If people are bullish on Chinese blue chips, FXI is creating more stocks to meet demand. If investors are not interested, the fund reduces the number of its shares in response.

Today, shares outstanding for FXI are at a multi-year high. Demand for Chinese stocks has increased, even as these stocks collapse. Looked…

The number of shares has increased, despite the decline in the price of FXI. Investors expect the trend to turn in their favor. But that’s unlikely …

To see why, I’ve looked at other times when FXI’s stock counts hit multi-year highs. This happened in 2009, 2013, 2015 and 2019.

Each spike in sentiment resulted in losses over the next six months and the following year. Looked…

The worst of the downturns came in 2015. FXI fell about 24% in a year after outstanding stocks peaked 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 the next six months and the following year.

Now, we cannot yet be sure whether today’s bullish sentiment is at a near term peak. But it’s high compared to history.

Additionally, if the price decline continues, these bullish investors will start to question themselves. Then they will head to the exits. This is when we will want to start paying close attention …

We will turn more bullish in this market when sentiment turns bearish and the trend reverses. But this is not yet the case …

As we move into the New Year, you want to avoid this common pitfall. And that means staying away from Chinese equities for now.

Good investment,

Chris Igou

CUSTOMERS CANNOT MAKE ENOUGH OF THIS FAST FOOD PLANT

Today we are looking at a reputable company that succeeds by selling addictive food…

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

McDonald’s (MCD) is a $ 200 billion fast food giant. It has nearly 40,000 sites in over 100 countries. People around the world can’t get enough of his burgers and fries … And even as we continue to navigate the pandemic, customers are flocking to his restaurants. In the third quarter, McDonald’s reported a 14% year-over-year increase in net sales to $ 6.2 billion, in part thanks to an almost 13% increase in global same-store sales.

As you can see from today’s chart, MCD stocks are also performing well. They have increased 150% over the past five years, including dividends… And they recently hit a new all-time high. As long as people continue to crave burgers and fries, this fast food giant should take advantage …