Senior Managing Editor’s Note: We would like to welcome Rick Pendergraft to Banyan Hill today. He joined Paul Mampilly’s team as a senior analyst with 18 years’ experience in investment research. He will be filling in for Paul over the next few weeks as Paul travels with his family and works on some new investment ideas. — Jocelynn Smith
I first entered the investment publishing industry in September 2000. What perfect timing, right? Almost the exact high of the tech-driven bull market, at least for the S&P 500.
The publisher I worked for was focused on options trading and was one of the first to switch to the bearish camp. By being in the options industry and open to playing either side of the market, there were times we were rooting for the market to go down.
To some that might seem wrong, but it’s true. A free market should be able to go down just like it goes up. Unfortunately, some people don’t see it that way.
Watching the market decline as a bear was tricky. You wanted to help people make money, or at the very least help them protect what they had.
Trading a decline is also tricky. The market tends to go up easier and more frequently than it goes down.
Then there was the theory that as a bear you were fighting an outside force.
We lovingly referred to it as the plunge-protection team (PPT). There was a sense that the PPT was a combination of the Federal Reserve, the exchanges and the big investment banks working in secret to stabilize the market. We were regularly faced with days where the market would decline for the first half of the day and then rally back to breakeven by the close.
Of course, as bears, we didn’t want that. We weren’t happy that they were interfering with the market and our potential profits.
Today, the market is on a great bullish run and there is little need for a PPT. But there is another PPT at work.
Instead of Fighting This Plunge-Protection Team, You Can Invest With It
During the bear market days, the PPT worked against us. What we should have been doing was figuring out how to benefit from its activities. Today, we can do just that.
While the old PPT may have been secretive and working behind the scenes, the one that is in action today is anything but secretive, and it is active during a bullish phase.
You could even argue it is buying for investment purposes because it sees the stocks and exchange-traded funds (ETFs) as the best place to put its money.
I am talking about the Bank of Japan (BOJ).
The BOJ has been buying shares in Japanese ETFs since 2010. At this point, the holdings are close to $200 billion and account for almost 75% of the entire ETF market.
The BOJ has announced intentions to slow down its ETF purchases. But, it is highly unlikely that it will start selling its holdings. Like the Fed, the BOJ is responsible for maintaining order in Japan’s economy. If it started selling its holdings, it would likely create a bear market and possibly even a recession.
With the BOJ not selling, it is highly unlikely that the Japanese market will see enough selling pressure to drive stocks down. The BOJ has built-in floor for the market.
In the most basic principle of investing, stocks go up when there are more buyers than sellers. With the BOJ unlikely to sell, that means that 75% of the ownership isn’t selling. That only leaves 25% that could be sellers.
ETFs account for a great deal of stock ownership, and because the BOJ controls so much of the ETF market, I expect Japanese stocks to outpace U.S. stocks in the coming year.
After a prolonged period of worrying about deflation, Japan is seeing modest inflation. Modest inflation is good for the economy.
Don’t Fight the BOJ
You can see on the weekly chart below that the iShares MSCI Japan ETF (NYSE: EWJ) has been moving higher in a trend channel. It just recently touched the lower rail of the channel and looks like it is ready for its next leg higher. The EWJ is a pretty good barometer for the overall market in Japan.
Another item on the chart that makes me bullish is the weekly indicators. They are at the lowest levels they have been in some time. In past instances where the Relative Strength Index (RSI) and stochastic readings were low and reversed, it was a good time to buy the EWJ.
The Bottom Line
Why do I like Japan? The economy is improving; the annual GDP growth rate has improved in six of the last seven quarters. There is a lack of selling pressure thanks to the BOJ. And the overall market has been trending higher for the past few years.
These factors are why I think you should consider adding the EWJ to your portfolio. I believe the EWJ will outperform the SPDR S&P 500 ETF (NYSE: SPY) by a wide margin over the coming year.
This time around I am siding with the PPT.
Senior Analyst, Banyan Hill Publishing