Follow Up To Japanese ETF's

I have been watching the i-Shares MSCI Japan Index Fund (symbol: EWJ) for about 6 months now. On a pure technical basis this ETF, which tracks the MSCI Japan Index, has a high likelihood to move higher over the next 12 months.

Here's the setup in this monthly chart of the EWJ. See figure 1. The "next big thing" indicator is in the lower panel, and this indicator looks for those technical characteristics typically seen at market bottoms prior to changes in the secular trend. The indicator is now in the zone where we would expect a secular trend change to occur. With a close over the simple 10 month moving average, this is the technical confirmation that we expect a trend change from down to up to occur.

Figure 1. EWJ/ monthly

For example, let's design two studies utilizing the EWJ ETF. In study #1, we will buy when prices close above the simple 10 month moving average and sell when prices close below the 10 month moving average. Entries and exits are based upon monthly closes only.

Since 1991, such a strategy has yielded 6.23 EWJ points; buy and hold has netted a negative 3.75 points. There were 16 trades of which 37.5% were profitable; this is typical of a pure trend following strategy as there are a lot of little losers and several big winners. Your time in the market was 46%. The RINA Index, which is a measure of points gained, draw down and time in the market, was a lowish 24. Think of the RINA Index as measuring trade efficiency.

In study #2, we will only take those entries in the EWJ when the "next big thing" indicator is in the zone that suggests a trend change is likely and when prices close above the simple 10 month moving average. In this instance, the "next big thing" indicator is acting as a filter to screen out market noise. Our exit strategy remains the same.

Since 1995, study #2 yielded 8.57 EWJ points; buy and hold netted a negative 5.75 points. We have reduced our total trades to 6 and increased our percentage of winners to 67%. Time in the market was reduced to 33% as well. Our RINA Index, our measure of trade efficiency, increased almost 4 fold to 96. Of note the average trade from this strategy lasts about 11 months.

Similar results are also achieved with a tactical strategy that trades the Japan Smaller Capitalization Fund (symbol: JOF). See figure 2, a monthly chart of the JOF with the "next big thing" indicator in the lower panel.

Figure 2. JOF/ monthly

Let's apply strategy #1, our pure moving average strategy as noted above, to the JOF. Since 1991, such a strategy has yielded 1 JOF point; buy and hold was a negative 5 points. There were 16 trades of which 25% were profitable, and your time in the market was 36%. The RINA Index was a very poor 2.6.

In strategy #2, we are a little more tactical as we added the "next big thing" filter. The results are good and much improved over the pure moving average strategy (i.e., strategy #1). Since 1995, such a strategy produced 7 JOF points; buy and hold yielded negative 2 points. There were 7 trades (v. 16 from strategy #1) of which only 29% were profitable. Time in the market was reduced to 24%. The RINA Index improved over 20 fold, and this measure of trade efficiency is 62. Once again, using the "next big thing" indicator as a filter improves the efficiency of a simple moving average trading system.

So let's summarize this technical set up. In the EWJ and JOF, the "next big thing" indicator suggests a high likelihood of a secular trend change, and combining this filter with a popular moving average model has improved the efficiency of this pure trend following method alone.