Mass Buying Isn't a Contrarian Signal for This Market

By Brett Eversole

"I'm spending a lot of time in Washington," my friend Brendan told me a few years ago...

From his tone of voice, I could tell he wasn't excited about it. He's an investment guy, not a politics guy. But like it or not, he had to do the job.

Brendan Ahern is the chief investment officer of KraneShares, a China-focused exchange-traded fund ("ETF") provider... And when we spoke back then, political tensions meant many of the most well-known Chinese stocks were at risk of being blacklisted in the U.S.

That threatened Brendan's business, obviously. But more than that, he knew it would set back U.S. investors. So he spent months explaining why widespread blacklisting was the wrong decision... speaking to anyone who would listen.

Fortunately, major China blacklists didn't happen. And today, U.S. investors have been buying Chinese stocks at a record pace.

Normally, that would be a warning sign. But we shouldn't worry about the money moving into China today... Instead, this shift is a sign that the boom can continue.

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We covered the recent boom in Chinese stocks last week. The Chinese government is unleashing stimulus to boost the economy and stock market.

Chinese stocks have jumped 20%-plus since the low last month, even with a slight pullback along the way. And that quick rally has caught the attention – and dollars – of more investors.

We can see it by looking at the shares outstanding of the two largest Chinese-stock ETFs... the iShares China Large-Cap Fund (FXI) and the KraneShares CSI China Internet Fund (KWEB).

These two funds own different baskets of Chinese stocks. FXI holds the largest Chinese companies that trade in Hong Kong... while KWEB owns foreign-listed Chinese tech stocks. Between the two of them, they have roughly $18 billion in assets.

Importantly, ETFs like FXI and KWEB can create and liquidate shares based on investor demand. So if investors pour money into either fund, that fund will create new shares to meet demand.

This makes shares outstanding a valuable sentiment gauge. When share counts are rising, investors are excited about an idea. And that's exactly what we've seen in Chinese stocks.

Shares outstanding have soared for both of these funds since the Chinese government announced reforms. Take a look...

KWEB's recent move sent shares outstanding to a one-year high. Meanwhile, FXI's shares outstanding soared to a new all-time high. And its overall share count more than doubled since last month.

Normally, we'd view this kind of excitement as a worrying sign. But in this case, it's exactly what the Chinese government is trying to achieve...

Remember, one of the big problems with China's stock market is that foreign investors are scared of owning it. Its government staged major crackdowns in recent years... And foreign investors fled as a result.

China is trying to reawaken animal spirits both at home and abroad. That's what needs to happen for the current rally to last. And judging by the cash flowing into these major China ETFs, the policies appear to be working.

This is a good sign. We want to see more and more investors get excited about the opportunity in China... That's what will drive the next leg of the boom.

Good investing,

Brett Eversole