Benefit of a doubt

Japan looked like the model for economic recovery – until yesterday. On Monday we learned that the world’s third largest economy unexpectedly fell into recession last quarter.  Analysts squarely lay the blame on April’s sales tax hike. The increase in Japan’s consumption tax from 5% to 8% was implemented to help rein in the country’s debt, but it ended up hampering consumer spending which accounts for two-thirds  of that country’s economy.

Blog Nov 18 Japan Inflection Point

The diminished outlook for Japan’s economy is impacting Japanese financial markets. iShares MSCI Japan (EWJ), a $14.8 billion exchange-traded fund which serves as my proxy for the Japanese stock market, is experiencing an intermediate-term momentum tug-of-war (shaded area, top chart).  However, as you can see below EWJ’s major trend is bullish and when viewed in that broader context, odds favor higher prices in the weeks ahead.

Blog Nov 18 Japan Major Trend

My newsletter’s timing model for Japan Funds generated a buy signal on October 31.

 Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. ♦

強気市場

I came of age in the 1980s: I graduated from college, married and bought a home. In 1986 I accepted an invitation from my Dad to become part of his investment advisory business and less than a year later the US stock market crashed – the Dow Industrial Average plunged nearly 23% in a single day. It’s a decade indelibly imprinted on my mind. But there’s another big association I have with the 1980s and no, it’s not massive shoulder pads, though I am guilty of wearing them. When I think of the 1980s I remember Japan going on a real estate binge in the US and purchasing high profile properties like Rockefeller Center, Pebble Beach Golf Course and Columbia Pictures. I recall how it annoyed me to see a foreign country seemingly buying up America, but it really got under my skin when, in 1989, a Japanese company, Victoria Ltd, bought the Stratton Mountain Ski Resort in southern Vermont, my home state.

BLOG 4-25-2013Supported by low interest rates, the ’80s decade was a period of great wealth and optimism in Japan. Rumors even circulated of Tokyo businessmen sprinkling their drinks with gold dust. Then, suddenly, the Japanese bubble that began in the early 1970s burst and the Nikkei 225 index, Japan’s primary stock market benchmark, entered a long, long period of decline. Between 1985 and 1989 the Nikkei tripled in value, reaching a historical peak in December 1989 at 38,915, and in March 2009 the Nikkei fell to its lowest level in 26 years at 7,055 – about a fifth of its all-time high value. Those 20 years of economic stagnation are now called “the lost decades”.

Five years later, thanks to trillions of Yen in monetary stimulus, Japan’s stock market is on a tear. After surging almost 23% in 2012, the Nikkei 225 is up nearly 34% year-to-date and, at today’s close, stands at 13,884 – just 0.3% from its April 24 all-time high. After many false starts over the years, this rally looks like the real deal.

I added a strategy for trading the Japanese stock market to my newsletter back in 2006, feeling that the tide eventually had to turn and there would be tremendous investment opportunities for traders interested in international markets. My intermediate trend-based strategy generated a buy signal on November 21, 2012. However, I’m watching some potential resistance around Nikkei 14,000, which also happens to be one of those psychologically important round numbers – you can see the downward trend line on the 30-year Nikkei chart above.

I base my movements in and out of Japan stocks on the iShares MSCI Japan Index (EWJ), an exchange-traded fund with $10.3 billion in assets that is currently comprised of 313 companies.  Another way to get exposure to the Japanese stock market is though WisdomTree’s Japan Hedged Equity Fund (DXJ), a $7.6 billion exchange-traded fund. What’s interesting about DXJ is that it hedges its currency exposure to the Japanese yen which means the fund’s performance is a reflection of the changes in value in the companies’ stock prices without the effect of currency fluctuations.

For now, my Japan stock market reading: Bull market.

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Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog.