A RISING YEN ISN'T GOOD FOR JAPANESE STOCKS -- BUY JAPAN'S CURRENCY, NOT ITS STOCKS -- NASDAQ BREAKS LOWER LINE IN BEARISH TRIANGLE -- ANOTHER MARKET DOWNLEG APPEARS TO HAVE STARTED

JAPAN ECONOMY IS EXPORT-ORIENTED ... I received a number of responses to my February 29 article on the rising Japanese yen and why that was bad for global stocks. Some of the questioners seemed to have missed the point of the article or either misunderstood what I was trying to say. One asked me to stick to commenting on U.S. stocks since that was what he was interested in. The article was about U.S. stocks and global stocks in general. Hence the headline: "Why A Rising Yen Isn't Good for Stocks". In fact, the upturn in the yen starting last July coincided exactly with the start of the topping process in U.S. stocks (see Chart 1). Each upturn since then (see arrows) has coincided with another downleg in the U.S. stock market. The fact that the yen is trading at a three-year high against the U.S. Dollar is putting more downside pressure on U.S. stocks and the U.S. Dollar. That combination is helping to boost commodities. Another reader argued that I failed to point out that the Japanese stock market looked very weak. I never said that it wasn't. Japanese stocks have been among the world's weakest performers. I was suggesting purchase of the Japanese yen, not Japanese stocks. In fact, the rising yen should have a negative impact on Japanese stocks.

Chart 1

BUY THE JAPANESE YEN, NOT JAPANESE STOCKS... Japan's economy is driven largely by exports. That makes the direction of its currency very important. A rising yen makes Japan's exports less competitive around the world (especially in the U.S.) and hurts that country's economy and stock market. Since we're talking about "relative" performance here, we need to use a relative strength ratio to determine the possible impact of yen moves on the Japanese market. Chart 4 does that. The orange line is the Japanese yen since 2002. The blue line is a ratio of the Nikkei 225 to the S&P 500. [Since we're talking about the dollar/yen relationship, I'm comparing Japanese stocks to U.S stocks]. The yen started rising against the dollar in 2002 and continued rising until the end of 2004. During those three years, the Nikkei/S&P 500 ratio (blue line) declined. In other words, Japanese stocks underperformed U.S. stocks as the yen rose. That changed at the start of 2005 when the yen started dropping and continued dropping into the middle of 2007. During that time span, Japanese shares did better than the U.S. It wasn't until the yen turned up in the middle of 2007 that Japanese stocks took a noticeable underdog role once again against the U.S. market and most other global markets. While the rising yen since last summer has been bad for global equities, it's been especially bad for Japanese stocks. The moral is this: Buy the Japanese yen, not Japanese stocks.

Chart 2

MARKET INDEXES UNDER PRESSURE ... The market continues to selloff. Chart 3 shows the Nasdaq Composite (which has been the weakest of the major market indexes) having broken the lower line in a bearish symmetrical triangle. That raises the odds for a drop to new lows. One of our readers asked to see a chart of the Dow. Here it is. Chart 4 shows the Dow Industrials also breaking a support line drawn under the lows of the last month. An even closer view is seen by the Dow's hourly bars in Chart 5. That chart shows the Dow threatening some chart support formed around February 11 at 12069. A close below that level would be more evidence that the market trend is turning back down again.

Chart 3

Chart 4

Chart 5