Japan illogic follows the panic

Posted by: Aaron Pressman on January 18, 2006

What do the following number pairs have in common?

+0.1 and -1.1
-0.7 and +0.1
+1.1 and +0.5
-1.8 and +1.5
+0.5 and -1.9

Hmm, not much it seems. The pairs represent the daily gain or loss in the iShares MSCI Japan Fund (symbol EWJ) and the next day’s Nikkei 225 Index results. You’d have to conclude from trading over the last week that the iShares fund, which trades during NYSE hours while Japan sleeps, has little or no predictive value for the next day’s Nikkei. And yet – there’s plenty of commentary today saying that weakness in the iShares fund right now signals a weak open in Japan tomorrow. Don’t buy it.

There are a few reasons to worry about the strength of the Japanese market for fundamental reasons, starting with the yen rally that will hurt exporters there, but the seemingly panic-fed sell-off the last few days smells ready for a short snapback. The fine analysts over at BCA Research suggest smaller cap Japanese equities which aren’t dependent on export earnings. No iShares fund for small cap Japanese stocks yet but there are a few mutual funds.

p.s. yes, one week is a short time horizon, but my spreadsheet goes on for a year and the correlation doesn’t get any better.

Reader Comments

Tom

January 19, 2006 8:07 PM

I am not a big fan of speculating in small cap Japanese stocks at this time. However, I have a nine month-old position in MTU which has played well to date. I am hopeful that size, indeed, matters and will translate to better quality earnings and a more pronounced regional presence. Another bank I have a position in is IBN (India). I believe this is another great way to play economic progress in that area of the world while mitigating risk of third-world small cap stock touts.Another interesting stock is BNS, which is quietly expanding into a world-wide bank.
I have had a position in BNS since mid-2003.Just some random thoughts. Nice to see BW blogging!

GoodAnalyst

January 21, 2006 10:27 PM

Very interesting observation, indeed! I just wrote another article at goodanalyst.com but never thought of checking the relation between EWJ and the Nikkei open. Thanks for the insight.

Steven Towns

January 23, 2006 4:31 PM

Does it help if you reverse the reading of your gain/loss pairs? I do agree however, don't "bet" on EWJ's movement to reflect the following trading-day direction of the N225.

Aaron Pressman

January 24, 2006 10:23 AM

Steve - Trading in EWJ pretty much follows on from whatever happened earlier in the day in Japan, yep.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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