Stalking Japanese Small Cap ETF

From a technical perspective, I seem to be much more enamored these days with Japanese equities as opposed to US equities, which are highly overbought and over subscribed too.

I last highlighted Japanese equities on December 17, 2009, when we took a look at the i-Shares MSCI Japan Index Fund (symbol: EWJ). Since this mention, EWJ has outperformed the S&P500 by about a 2 to 1 margin - not bad in a difficult tape. My reasons to be bullish on EWJ continue to be: 1) the "next big thing" indicator plus positive technicals point to a secular trend change; 2) weakness in the Japanese Yen, which is poorly correlated to EWJ, and it is my expectation that a weaker Yen equals a stronger EWJ.

The Japan Smaller Capitalization Fund (symbol: JOF) is a moderately liquid closed end fund that also has the technical characteristics of an asset ready to move higher. See figure 1 a monthly chart of JOF. The "next big thing" indicator is in the middle panel, and this peaked back in early, 2009 when JOF bottomed. More importantly, the indicator in the lower panel looks for statistically significant periods of consolidation -i.e., shrinking volatility - that lead to explosive price moves as volatility (which is cyclical) increases. This indicator now shows that prices have been in a range for about 6 months.

Figure 1. JOF/ monthly

For aggressive traders, a break of the down sloping trend line (formed by two pivot high points) is positive. A monthly close over the most recent pivot high point at 7.95 is very bullish. This base, which looks like an inverse head and shoulders top, would have a price projection of $10 for JOF. This is a 25% gain from the $7.95 pivot. A monthly close below $7 would be reason enough to liquidate this trade.

Of note, JOF is much more volatile than EWJ, and a weak US equity market may serve as a moderate headwind for this issue.