Tuesday, January 20, 2015

The Nikkei 225 - the ultimate global laggard

Now with the current global equity bull getting old – investors need to adopt some type of defensive strategy. They could try to “time” the market, reduce leverage, raise the cash component – or seek out asset classes that may operate inversely to the broader stock bourses.

I would think any form of market timing to be a bad idea because historically the market advances about 85% of the time – I have 50 years of data from Ned Davis Research to support this fact. Most market timers if wrong – sell and then end up chasing their positions at higher prices  Market timers have to get it right twice – on the sell and the buy side. The strategy of reducing leverage, or raising the cash component make more sense – at least your still in the game. Most portfolio managers simply re-balance by cutting exposure to their winners and adding to their losers.
Seeking out inverse assets is a good plan – if you can find them. Japan could be a candidate because it has a history of operating inversely to most of the global bourses. Japanese stocks as measured by the Tokyo Nikkei 225 peaked in December 1989 and began a secular decline that ended at the global financial crisis lows of 2008 – 2009. Keep in mind the Tokyo Nikkei 225 is a direct beneficiary of lower crude prices and a weak domestic currency. The investable clone is the iShares MSCI Japan ETF (EWJ) which seeks to track the investment results of an index composed of Japanese equities.

The attached chart is a quarterly bar (thanks to MetaStock which I am not good at) of the Nikkei 225 spanning about 25+ years – note the completed 3-cycle secular bear count. 


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