Heavy Selling Hits Japan ETFs: Time To Buy?
Extraordinary selling overtook Japan's stock market Thursday, leaving it with the largest one-day loss since the March 2011 earthquake and tsunami. Investment strategists generally say it's a chance to jump into the market before it rises again from ongoing massive economic stimulus and yen devaluation.
iShares MSCI Japan Index ( EWJ ) -- the most widely traded Japan ETF by assets -- gapped down 7.5% at the open. Buyers stepped in right away and pared the session's losses to 4.2%. Volume swelled three times average.
WisdomTree Japan Hedged Equity ( DXJ ) -- which aims to neutralize currency fluctuations -- plunged 8.4% at the open and reversed higher, ending down 4.28%.
CurrencyShares Japanese Yen Trust ( FXY ), measuring the yen against the dollar, surged 1.10% to 96.17 as it bounced back from oversold levels.
"Japan's market has more than doubled in six months and is due for a break," Harry Dent, founder of HS Dent, an economic research and forecasting firm based in Tampa, Fla., said in an email. "All it took was a hint that the Fed is looking at tailoring down QE (quantitative easing) and the resulting pullback in the U.S. markets. Japan is more extreme and more overbought so it pulled back more."
Dent believes Japan's stock market will correct 5% to 9% from its recent high and rally one more time before peaking this summer.
Bill Witherell, chief global economist at Sarasota, Fla.-based Cumberland Advisors with $2.2 billion in assets under management, says he's buying the dip.
"The reasons for further increases in this market and further depreciation of the yen remain intact," Witherell said in an email. "The risk of reaching a top are admittedly greater now than earlier in the year but I don't think we are there yet."
The sell-off should be considered a "healthy correction," say David Kelly and Yoshinori Shigemi, global strategists at J.P.Morgan Funds.
Abenomics' Wealth Effect
Japan Prime Minister Shinzo Abe's policies have bolstered retail sales, especially for luxury and durable goods, "which could result in a possible positive feedback loop," Kelly and Shigemi wrote in a client note Thursday. The central bank's monetary policies have successfully devalued the yen, benefiting exports and stoking badly needed inflation.
"The approval rate of the Abe administration is above 70%, raising the likelihood that the administration could win the upcoming Upper House election in July," Kelly and Shigemi continued. "Such an election outcome should accelerate structural reform, known as the 'Third Arrow,' which includes deregulation, free trade agreements and the lowering of corporate taxes."
A major risk to Japan's market is rising government bond yields, currently 1% for 10-year issues, which could dampen borrowing, investments and corporate earnings, they added.
In the first quarter, Japanese household consumption rose 4% year over year while retail sales climbed 0.7%, owing to the wealth effect sparked by the weak yen, strong stock market and positive sentiment driven by Abenomics, according to Credit Suisse analysts. However they see consumer spending slowing from the second quarter on.
"Base wage growth has so far failed to keep pace with recent price hikes for energy, foods and various other basic necessities, and there is also a possibility that concerns about Japan's longer-term fiscal sustainability will be more loudly voiced after the Upper House election in July," Credit Suisse analysts wrote in a weekly Japan economics report released Thursday.
EWJ and DXJ have corrected only 6% from their 52-week high, which is considered a normal pullback in an uptrend. They both trade above their 50- and 200-day moving averages, indicative of a strong uptrend. EWJ has advanced 19.17% year to date while DXJ soared 36.54%.
Japan's market has soared for three main reasons this year, says Carl Delfeld, founder of Chartwell Pacific .
"Investors (who) short the Japanese market got squeezed, institutional investors scrambled to increase their underweight allocations to Japan, and investors are banking on much higher profits from Japanese exporters as they gain a pricing edge from a weaker yen," he wrote in a client note. "Investors should ride this booming market provided they have a trailing stop loss in place."
DXJ sports the highest IBD Relative Strength Rating among country ETFs at 91. That mean DXJ's price performance has outpaced 91% of the market in the past 12 months. It carries a best-possible "A" IBD Accumulation/Distribution Rating. That means institutional investors are heavily buying shares and not selling. DXJ has to rise another 17% to regain its 2007 pre-financial crisis high, suggesting more upside potential.
DXJ absorbed $881 million in the past week -- the most of any ETF -- according to Lipper Inc. EWJ took in $629 million, ranking third highest in ETF inflows.
The technically weaker small-cap ETFs, DFJ and SCJ, have corrected 7% from their recent peaks. Both trade below their 50-day moving averages but above their 200-day lines, indicating weaker uptrends than the large-cap ETFs. DFJ has advanced 11.94% year to date while SCJ climbed 15.22%.
Japan ETFs And Percentage Price Change May 23, 2013
Barclays iPath Yen/U.S. Dollar (JYN) 0.0%
Currencyshrs Japan Yen ( FXY ) 1.1%
db X-trackers MSCI Japan (DBJP) -5.6%
First Tr Japan Alphadex (FJP) -4.7%
Ishares MSCI Japan ( EWJ ) -4.6%
Ishares MSCI Japan Small Cap ( SCJ ) -4.7%
Ishares S&P/Topix 150 (ITF) -5.4%
Maxis Nikkei 225 (NKY) -4.8%
Powershrs Db 3X Japan Gov (JGBT) 0.0%
Powershrs Db Inverse 3x Japan Govt Bond (JGBD) -2.0%
Powershrs Db Inverse Japan Govt Bond (JGBS) -0.9%
Powershrs Db Japan Govt Bond (JGBL) -0.5%
Proshrs Ultra MSCI Japan (EZJ) -9.3%
Proshrs Ultra Yen (YCL) 2.0%
Proshrs Ultrashort MSCI Japan (EWV) 9.2%
Proshrs Ultrashort Yen (YCS) -2.3%
Spdr Rus/Nom Prime Japan (JPP) -5.5%
Spdr Rus/Nom Small Cap Japan (JSC) -5.9%
Wisdomtree Japan Hedge Eq ( DXJ ) -4.8%
Wisdomtree Japan Small Cap Div ( DFJ ) -5.3%
Follow Trang Ho on Twitter @TrangHoETFs .