JAPANESE MOVE TO NEGATIVE RATES PUSHES YEN SHARPLY LOWER AND JAPANESE STOCKS HIGHER -- THAT FAVORS WISDOM TREE JAPAN HEDGED EQUITY ETF OVER JAPANESE ISHARES -- FTSE ALL WORLD STOCK INDEX IS AT POTENTIAL SUPPORT LEVEL AND OVERSOLD
PLUNGE IN YEN... The Bank of Japan (BOJ) announced this morning a move to negative interest rates for the first time in its history. That pushed Japanese yields sharply lower and caused the yen to plunge. Chart 1 shows the Japanese yen plunging -2% today, which is its biggest drop in more than a year. The yen lost more than a third of its value since the BOJ launched quantitative easing three years ago. It rebounded a bit since midyear, but is turning down again. [Today's plunge in the yen is the main reason that the U.S. Dollar is bouncing]. The plunging yen should be good for Japanese stocks (and maybe global stocks as well). The Nikkei 225 jumped 476 points (2.8%) on the news. Global stocks are bouncing as well. A falling yen also means that investors buying Japanese stock ETFs need to make sure to hedge out the negative impact of the falling yen.
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Chart 1
JAPANESE STOCKS BENEFIT FROM FALLING YEN... Japanese stocks have historically had a strong negative correlation to the yen. Chart 2 shows that very clearly. The major uptrend in the Nikkei 225 (orange bars) started near the end of 2012 when the BOJ first announced the start of quantitative easing. It did that to weaken the yen. A weaker yen boosts Japanese exports which would strengthen its economy. It was hoped that a weaker yen would also boost Japanese inflation which was locked in a 15-year span of price deflation. The jury is out on the deflation front. Since Japan includes energy in its core inflation, falling oil prices have kept its inflation rate dangerously low. The good news is that the falling yen had a very bullish impact on Japanese stocks. The Nikkei nearly tripled in value between 2012 and mid-2015 as the yen plunged. The bounce in the yen since midyear cost the Nikkei more than 20% of its value. As usually happens when the yen plunges, Japanese stocks jumped sharply today. It may also be worth noting that the Nikkei has retraced 38% of its 2012-2015 advance and may be finding support along its mid-2014 peak near 16000.
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Chart 2
WHICH ETF TO USE ... Investors wishing to buy Japanese stocks via an exchange traded fund (ETF) need to take currency swings into consideration. The popular Japanese iShares (EWJ) is quoted in U.S. dollars. As a result, it underperforms when the dollar is stronger than a falling yen. While investors benefit from rising Japanese stocks, they lose on the falling yen. Today, for example, Japanese iShares (EWJ) are bouncing 1.7% which is only half the gain in the Nikkei. The EWJ is being held back by the -2% drop in the yen. By comparison, the Wisdom Tree Japan Hedged Equity Currency ETF (DXJ) is up 3.6%. The DXJ hedges out the negative impact of the falling yen. Chart 3 shows the Wisdom Tree DXJ gapping higher today. It remains in a downtrend, but the action is encouraging. Its 14-day RSI (top of chart) is bouncing from an oversold condition, while its MACD lines have turned positive. The strong rebound in Japan may also be lending support to other global stocks which are also in oversold conditions.
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Chart 3
FALLING YEN FAVORS CURRENCY HEDGED ETF ... The orange line in Chart 6 is a "ratio" of the Wisdom Tree Japan Hedged Equity Fund (DXJ) divided by Japanese iShares (EWJ). The green line shows the direction of the Japanese yen versus the dollar. The two lines move in opposite directions. In other words, a falling yen favors the DXJ. That was the case from mid-2014 to mid-2015. A rebound in the yen in mid-2015 pushed the DXJ/EWJ ratio lower which favored the EWJ. The recent downturn in the yen now appears to favor the DXJ.
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Chart 4
FTSE WORLD INDEX TESTS 2011 PEAK... The weekly bars in Chart 5 show the FTSE All World Stock Index ($FAW) rebounding today. Some of that may have to do with the BOJ move to negative rates. It may also have something to do with global stocks being in an oversold condition. The 14-week RSI line (top of chart) is bouncing off oversold territory at 30 for the second time. That slight "positive divergence" is usually a positive sign. The most important line in the chart, however, may be the horizontal line drawn over the 2011 peak near 235. Market corrections often find support at a prominent peak. In other words, previous resistance turns into new support. That's why the horizontal line changed from red to green once the 2011 high was exceeded. It may also be significant that the FAW has retraced half of its 2011-2015 rally. All of which may support more stabilization in global stocks. A falling yen is also usually supportive to global stocks.
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Chart 5
DID AT&T REALLY HIT A NEW RECORD?... One of our readers questioned my statement yesterday that AT&T (T) was trading at a new record. The monthly bars in Chart 6 show that to be the case. The reader points out, however, that he prefers to use "unadjusted" prices for stocks that pay high dividends to give a truer picture of the price action. Factoring out dividends would result in lower prices for the stock. It seems to me, however, that using unadjusted priced opens up all kinds of problems. How does one decide when to adjust for dividends and when not to. Some investors prefer to use prices adjusted for inflation. I'm not a fan of that because I believe the market already does that. I suspect it does the same for dividend paying stocks. AT&T is being bought precisely because it pays dividends. How can that expectation be factored out of its price gains. More importantly, it would make comparisons between charts of adjusted versus unadjusted stocks pretty difficult. I don't see anything wrong with someone using "unadjusted" prices if that works for them. I like to keep things simple. Chart 6 shows a stock reaching an all-time high. That's good enough for me.
