Japanese market's upside potential

A comparative look at global stock markets shows which ones are outperforming the US, with some interesting results.

By MoneyShow.com May 16, 2013 8:42AM

Japan © Stockbyte SuperStockBy Moby Waller, BigTrends.com 

It's been another strong year for the U.S. markets in 2013, thus far (as we had forecast after the first few weeks of the year). 

But many international single-country ETFs are lagging, or even actually down on the year. Only one big country name is outperforming the S&P 500 (SPY), and that country is . . . Japan (EWJ).

Take a look at the relative performance data below:

Click to Enlarge

But even while the iShares Japan Index (EWJ) and the SPYders are up double digits this year, 10 major single country ETFs that have option trading and average volume over 100,000 per day are actually in negative territory on the year:

  • iShares Canada Index (EWC)
  • iShares Italy Index (EWI)
  • iShares Chile Market (ECH)
  • WisdomTree India Earnings (EPI
  • iShares China Index (FXI
  • MarketVectors Russia (RSX
  • iShares South Africa Index (EZA
  • iShares South Korea Index (EWY
  • iShares Peru Index (EPU
  • Global X Colombia (GXG)

Notice the wide global diversification of these names (see MoneyShow) is not confined to one geographic area or heavily reliant on just commodities, for example. This indicates the general money flow going into U.S. and Japanese blue chips this year in particular -- perhaps in search of dividend yield and relative safety.

Japan is a fascinating stock market and economy, pretty much unique in the world. It reached a bubble euphoria stage in the late 1980s, which peaked when the Nikkei reached over 35,000 in 1989/1990. That's when the real estate land under Tokyo was rumored to be worth more than the whole state of California at the time.

The EWJ ETF is the most liquid and well-known Japanese ETF for U.S. trading, but there are others out there that are fairly liquid and with option trading available, such as WisdomTree Japan Hedged Equity (DXJ) and Maxis Nikkei 225 Index (NKY).

If you look below at the long-term Nikkei 225 chart, you can see it hasn't come close to recovering that value in the 23 years that have passed.

Click to Enlarge

Zooming in just a bit (if you consider 20 years of chart to be zoomed in), you can see below that the 20,000 area marked tops in the Nikkei many times in the 1990s and into the year 2000. The 18,000 area marked another top in 2007 before the worldwide crash that sent it to lows in 2009. 

The Nikkei bottomed out in 2009 all the way down below 8,000, similar to the bottom in 2003. From 2009 until late last year, the Nikkei wasn't able to make headway, forming a narrowing consolidation pattern. This type of chart pattern often precedes a breakout or breakdown -- in this case it's clearly been to the upside.

Click to Enlarge

Since November of 2012, the Nikkei has been on a sharp upward trend -- that's also when a key bottom in the U.S. markets was reached before we began this steady uptrend that continues today and has taken us to all-time highs. Since the week of November 5, 2012, the Nikkei is up an astounding 69%, according to the data above from Yahoo Finance.

Bottom line
In my analysis, the Nikkei 225 Index looks likely to once again test the 18,000 highs reached a few years ago -- about 21% higher from here. Remember, however, this is a long-term chart, so this move could take six months to three years from now -- and the pace of the recent gains is likely unsustainable without a consolidation and/or pullback. 

Another test of 20,000 on the Nikkei is also possible, but that is 35% higher from here and could take one to five years to play out. But there does appear to be a long-term bull trend in place on Japan, if history is any guide.

MSN Money on Twitter and Facebook

May 16, 2013 11:05AM
I say a test of 10,000 or lower is far more likely than any test of 20,000. A breakout based on Fake Money won't last, can't last. The focus should be more on the Soaring Japanese Debt that they can't repay. Printing Monopoly money will only make it worse.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.