Watching EWJ

Country specific ETF's have been crushed this year, and like the US equity markets, investors are wondering where is the bottom. Japan has been no exception, and the i-Shares MSCI Japan Index Fund (symbol:EWJ) has lost over 50% of its value in the last 15 months.

To visually see the carnage, check out figure 1, a monthly graph of EWJ. The "next big thing" indicator, which seeks to identify the potential for secular changes, is shown in the bottom panel.

Figure 1. EWJ/ monthly

EWJ should be watched closely for the following reasons: 1) the "next big thing" indicator is close to the zone that has signaled past bottoms; 2) EWJ is approaching its all time lows, and for those investors looking to "catch a falling knife" in a market plunge, this might be a good place to put a buy order in; and 3) EWJ is only modestly correlated with US stocks.

Lastly, I will caution that the "next big thing" indicator only identifies the potential for a secular trend change. Therefore, EWJ goes on my watch list, and then I use more traditional technical analysis (i.e., moving average crossover) to enter and exit the market.