JAPAN LEADS GLOBAL ETFS DURING AUGUST -- EWJ ON VERGE OF MULTI-YEAR BREAKOUT -- NIKKEI HITS FOUR-YEAR HIGH

JAPAN ETF CHALLENGES 2005 HIGH ... At the start of August, I wrote that a weaker dollar was giving a big boost to foreign Exchange Traded Funds which were outperforming the U.S. That's because foreign ETFs benefit from rising stocks and rising foreign currencies. There have been some changes in the rankings of foreign ETFs during the first half of August however. [Please see John's Latest Performance Chart]. Japan has taken the top spot followed by Brazil and Canada. I'm going to focus on Japan today because it's been such a laggard for so long. Chart 1 shows the surge in the Japan iShares (EWJ) over the last two weeks. The EWJ has climbed on rising volume to challenge its early 2005 peak. The EWJ:SPX relative strength ratio has also climbed impressively during August. The EWJ had been an international laggard throughout 2005. Chartwise, both the EWJ and the Nikkei appear to be on the verge of multi-year bullish breakouts.

Chart 1

JAPANESE BREAKOUTS ... The weekly bars in Charts 2 and 3 show the Japanese stock market on the verge of an apparent multi-year bullish breakout. Japanese iShares are challenging the top of a bullish "ascending triangle" that's been forming since the spring of 2004. On Friday, the Nikkei 225 Index closed at a new four-year high (Chart 3). The line beneath Chart 3 is the Japanese yen. You'll notice that a rising yen since 2002 has made the EWJ stronger than the Nikkei. A drop in the yen during 2005 caused the ETF to underperform the Nikkei. With the yen starting to rise, there's a good chance that the Japanese iShares will resume its leadership role. It may not matter all that much since it appears that both Japanese indexes are scoring bullish breakouts.

Chart 2

Chart 3