When the "hot money" (trades that are merely following a trend) flows into any particular bet on Wall St, the "smart money" typically takes its profits and exits.
Nonetheless, it's always worth questioning whether a trend will continue to hold or is poised to snap back when the aforementioned smart investors get out. We could be seeing the two opposite ends of this concept playing out in equity markets in China and Japan, respectively.
China's "Hit Stocks"
The trading of stocks is not nearly as extensive or as mature in China as it is around the Western world. Nonetheless, the government has encouraged citizens to invest in Chinese companies with gusto as two major trading bourses now operate in Shanghai and Shenzen.
Due to its lack of development and unfamiliarity to the Chinese public, the country's stock markets have seen some odd gyrations in their incipient state. One of these irregularities is known as a "hit stock"—shares that have newly become listed for a company through an initial public offering (IPO). In essence, they're guaranteed winners if the investors are quick enough.
According to Bloomberg View's Matt Levine, "Chinese initial public offerings are systematically underpriced, because their prices are limited by regulation, so they always pop on the first day of trading." In some cases, this has netted these early-bird investors gains of 360% in IPOs listed on the exchange in Shenzen.
Other investors who aren't aware of this apparent trend tend to rush in in order to avoid FOMO, the fear of missing out. Nearly all of the opportunities for arbitrage are exhausted quickly, however, so many of these "bandwagon" buyers are too late. Nonetheless, this strategy can't possibly go on forever.
Japan's New Bull Market?
Conversely, Japan is home to the second-largest stock market in the world. Tokyo's flagship Nikkei 225 stock index has, unfortunately, mirrored the lackluster performance for the Shanghai Composite index. This has characterized 2016 despite government policies known as "Abenomics" (so-named for Prime Minister Shinzo Abe) intended to boost equities and the broader economy.
However, there are indications that strategists and fund managers are seeing better prospects across the Pacific than in the world's deepest stock markets in the U.S. There are fresh predictions that the Nikkei could enter a new bull market and reach new all-time highs in 2017 after years of generally stagnant returns. If there is indeed a dramatic shift of capital to the Japanese markets, this would certainly have a profound effect on investors' portfolios.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.