Can “Middle Gum” beat the bottom? Uncover the lessons of history!

This is a trap that many investors can't stop and can easily fall into.

When the market falls sharply, they will have the desire to buy stocks, hoping to break the bottom.

After all, as the old saying goes, we want to “buy low and sell high.” However, buying while stock prices are still falling is sometimes a dangerous game and usually results in losses.

Today, let's talk about a market that is in its downturn, but investors are flocking in, which sends a red flag that there may be further losses in 2022.

Zhonggai has caused quite a few people to lose money this year (we said it a year ago; stay away from China Securities; I don't know how many friends have done it). It has been particularly affected by the return to Hong Kong boom, but at this point, many friends will be curious. Is it really time to get to the bottom of it? After all, buying at the bottom is very attractive, and the potential profit is greatest. If you can make a big order, it will be enough to show off for a while.

As a result, many investors are ready to go undercover.

ETF-iShares (FXI) holds a basket of shares of leading Chinese companies listed in Hong Kong. This is one of the easiest ways for US investors to invest in Chinese stocks.

Importantly, FXI has continued to decline since peaking in February of last year, and since then FXI has declined by about 32%.

However, investors have not given up on this market. We can see this from FXI's total circulation share. The principle is simple:

FXI's unique fund structure allows it to increase or liquidate shares according to investors' needs. If investors are bullish on China's blue-chip stocks, FXI will issue more shares to meet demand; if investors are not interested in FXI, it will reduce its share in circulation.

Currently, FXI's share in circulation is at a high point for many years, and investors' demand to invest in Chinese stocks continues to increase, even if those stocks plummet. Please take a look at the image below:

Despite the fall in FXI's price, its share continues to increase, and investors expect this trend to turn in their favor, but that is unlikely.

To find out why, I looked at several other multi-year highs in FXI prices, which were the highs in 2009, 2013, 2015, and 2019.

Within 6 months and 1 year after the high point, every most extreme sentiment led to losses. Let's take a look at specific cases:

The biggest drop occurred in 2015, when FXI fell about 24% in a year after market bullish sentiment peaked, but this wasn't the only sharp drop.

At the beginning of 2013, we also saw a similar case. FXI experienced double-digit declines for the next 6 months and 1 year after showing extreme bullishness.

Currently, we are uncertain whether the current bullish sentiment will peak in the short term, but compared to historical levels, the current bullish sentiment is still very high.

Furthermore, if FXI continues to fall, then bullish investors will start to doubt themselves, then they will turn around and leave the market, and at that point we will start watching closely.

When market sentiment turns bearish and the trend reverses, we will be more optimistic about Chinese stocks, but that time hasn't come yet.

So as we enter the new year, avoiding this common trap means watching carefully.

(The opinions in this article only represent the author's personal opinions and are not used as any investment advice. Investment is risky, so you need to be cautious when entering the market)

Analyst: Chris Igou

Compiled by Samantha