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. ♦

Long time coming

 Today marks Japan’s first day of trading in the new year.  Looking back at 2013, it was quite a year for this island country: Japan earned the distinction of having both the world’s best performing stock market and worst performing major currency. Its benchmark index, the Nikkei 225 surged 57% for the biggest annual return in 40 years in a rally fueled by the Bank of Japan’s  extraordinarily expansive monetary policy. This same policy drove the Yen to a 22% loss on the year – its largest decline against the US Dollar since 1979. I’ve updated above the Nikkei chart from my April 2013 blog post. Back in April my intermediate-term newsletter timing model for the Japanese stock market was on a buy signal, but the long-term down-sloping trend line directly overhead had me questioning the longevity of that signal. As you can see, after 23 years the Nikkei has finally broken above that formidable resistance. Once broken, resistance often becomes support – a floor underneath prices.

♦ 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. 

From first to worst

U.S. stock market2Each day that Wall Street is open for business I monitor benchmarks for 18 different markets to gauge relative strength. The results help me to identify pockets of momentum. I posted this same ranking on May 8th and since then the Japan stock market has moved from the top spot all the way down to last place. The Nikkei 225, an index of the largest stocks traded on the Tokyo Exchange, turned on a dime May 22 and has lost 15% of its value in just 8 trading sessions. Of course, the Nikkei 225 was up 50% year-to-date before correcting. As the saying goes: the bigger the pop, the bigger the drop.

                             Markets by Relative Strength

1.  Russell 2000 Index                                10.  International bonds
2.  Nasdaq Composite Index                     11.  US bonds
3.  Nasdaq 100 Index                                  12.  International equities
4.  Dow Industrial Average                        13.  US high yield bonds
5.   S&P 500 Index                                       14.  US municipal bonds
6.  Wilshire 5000 Index                              15.  Gold
7.  US equities                                               16.  Asian equities
8.  European equities                                  17.  Latin American equities
9.  S&P 400 Index                                        18.  Japanese equities

My ranking is derived by applying a proprietary formula which incorporates performance over a variety of time periods, with more weight given to recent price activity. This is just one of many filters I use in determining newsletter model portfolio and managed account client recommendations.

♦ 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.