Japan Stocks In The Time Of Stimulus

Japanese stocks offer a favorable short-term trading opportunity following their recent sharp pullback from mid May to mid June.

While the Japanese economy still offers generally lackluster appeal from a fundamental perspective, their stock market continues to demonstrate a strong response from the monetary stimulus program recently initiated by Japanese policy makers in an effort to finally lift the domestic economy out of a more than two decade stagnation.  The stimulus plan announced on April 4 includes a doubling of the yen money supply by the end of next year, which can only be described as an extraordinarily aggressive program that has the potential to meaningfully inflate domestic stock prices along the way, particularly if recently elected Japanese Prime Minister Shinzo Abe’s LDP party prevails as expected in upcoming upper house elections on July 21.  Whether this extreme policy initiative ends well or not in the long-term remains to be seen, but its impact in the meantime on asset prices presents potential opportunity.

Japanese stocks now set up well technically following the recently sharp correction that helped skim a good deal of the froth that had accumulated in the market earlier in the year.  First, Japanese stocks remain in a clearly defined uptrend despite their recent pullback and have resumed their move higher over the last few weeks.  Also, the market as defined by the Wisdom Tree Japan Hedged Equity ETF (DXJ) enjoys a variety of well established support levels at its current price including the $48 price level as well as its 50-day, 75-day, 20-day and 125-day moving averages, all of which have recently provided strong technical support in maintaining the uptrend.  And in the last few trading days, Japanese stocks began edging its way back into a higher trading channel first established in early May with a strong relative strength and momentum tailwind at its back, suggesting that the market may soon make a run at its mid May high in the coming weeks.

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A long position was recently established in Japanese stocks via the Wisdom Tree Japan Hedged Equity ETF (DXJ).  This specific ETF is preferred in part because the exchange rate risk is hedged, which is attractive given the expectation for the Japanese yen to continue weakening relative to the U.S. dollar.  The initial upside target is set at $53.66, which is the previous high from mid May and represents +12% upside from the initial purchase price at $48.01 per share.  The initial time horizon on the position is between 15 to 45 days.  Initial downside tolerance is set on the position first at the upward sloping 20-day moving average that is now at $45.76 and represents -5% downside from initial price levels and then at the 125-day moving average that is currently at $44.23 and represents -8% downside from inception.  It is worth noting that both trendlines are upward sloping, which will diminish the downside potential as these support levels continue to rise.  All of these initial target levels will be subject to adjustment and fine tuning as the position evolves going forward. 

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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