LAND OF THE RISING SUN, THE RISING YEN, AND MAYBE EVEN A RISING STOCK MARKET
YEN JUMPS ON JAPAN TRADE SURPLUS... Last week I wrote about an overbought U.S. dollar running into resistance near 85 and starting to weaken. I showed that an oversold Canadian Dollar and Euro were starting to bounce (along with gold and gold shares). Today's focus is on the Japanese yen which is bouncing on news that Japan's trade surplus rose 28% during December to a new record. That news is bullish for the yen and potentially bearish for the dollar. As a result, the yen is opening sharply higher today against the dollar. As usual, there's also a technical reason for yen buying. Chart 1 shows that the yen is finding chart support along its early December low and its 200-day moving average. Its 9-day RSI line is also bouncing from oversold territory near 30. Chart 2 shows the yen over the last year and also shows it to be in chart support. That's because the yen is bouncing off the peak formed during June. Previous resistance levels, once they are broken, should become new support levels (see arrows). Yen strength over the last year has attracted foreign buying into the Japanese stock market. Even so, it's been one of the world's weakest stock markets. The good news is that may be changing. And that may make Japan one of the world's best stock market values.
Chart 1
Chart 2
JAPANESE STOCK MARKET MAY NEAR BULLISH BREAKOUT... Since 1990, the Japanese stock market has been the weakest in the world. It was also the weakest last year. But things may be finally looking up. Chart 3 shows the Nikkei 225 Index bottoming at the start of 2003. During the second quarter of 2004, it backed off from initial resistance formed near the start of 2002 (see arrows). That's pretty normal action. Since then, the Nikkei has been trading sideways in a "triangular" shaped pattern. That's bullish for two reasons. A triangle is normally a continuation pattern. That means that the next move should be to the upside. The second reason is that the next uptrend would probably break the horizontal "neckline" shown on the chart. That would represent a major bullish breakout for the Japanese market. The relative strength ratio along the bottom of the chart shows the Nikkei performance versus the S&P 500 (representing the U.S. market). After declining for more than decade. that ratio bottomed at the start of 2002 (see blue arrow) and has been moving sideways since then. [The Nikkei has actually done a little better than the S&P since April 2003]. A flattening out after several years of decline is a necessary ingredient in a bottoming process. Part of the reason for Japan's stability may be coming from a weaker dollar and a stronger yen.
Chart 3
Chart 4
JAPANESE YEN BOOSTS JAPAN iSHARES... Chart 4 shows that the Japanese yen bottomed at the start of 2002 and has been rising since then. That coincides with a major peak in the U.S. Dollar which has been falling since. One of the side effects of a weaker dollar is that it pushes money into overseas market. Japan has been one of the beneficiaries of that trend since 2002. One of the best ways to benefit from both of those trends (a rising Japanese yen and a rising Nikkei) is with Japan iShares (EWJ) which are plotted in Chart 5. If you compare Chart 5 to the Nikkei in Chart 3, you'll see that the Japanese ETF has been much stronger. The EWJ has already exceeded its early 2002 peak, which is now acting as a support level (see arrows). In addition, the EWJ has already broken the upper resistance line in its "symmetrical triangle" (see circle). The reason for its stronger performance is that the EWJ is priced in dollars -- while the Nikkei is priced in yen. The Japanese iShares benefit from rising Japanese stocks -- and a rising yen. The ratio of the EWJ versus the S&P 500 also shows a stronger performance than the Nikkei. That outperformance by the Japanese iShares increases along with the value of the yen.
Chart 5
JAPAN PROVIDES REAL GLOBAL DIVERSIFICATION... A lot is written about global diversification. Although it's true that foreign markets have done better than the U.S. over the last few years (owing mainly to the falling dollar), it's also true that global markets have been very closely correlated. In other words, they've been moving up in lockstep with each other. [The Europe Australia and the Far East (EAFE) Index shown in Chart 6 doesn't look much different than the U.S. market]. That diminishes the basic value of diversification which is to put one's funds into markets with little or no correlation. That's where Japan comes in. The land of the rising sun has the lowest correlation with other global markets. That may not mean much if the global bull market continues. If the global bull stumbles, however, most of the world's highly correlated markets will fall together. Since Japan has been a global laggard, and shows poor correlation to other markets, it's an excellent candidate for global diversification. And when global money managers decide that some of the world's strongest markets are getting overvalued, they're going to start looking for some place that's undervalued to do some global rotation. My guess is that Japan will be at or near the top of their list of places to put some money.
Chart 6
