While the S&P 500 was hitting 2016 highs on low volume last week, Japan’s Nikkei futures were not following the American markets lead, something was wrong. When the Tankan economic survey came out as a disappointment the Nikkei plunged over 4% and we found out exactly why Japanese markets where lagging: poor sentiment and economic conditions are scaring investors. Given that the Nikkei was such a drag on global markets earlier in the year, this index should be watched by traders as gauge for market sentiment.
For those that aren’t familiar, The Nikkei is Wall Street’s Japanese equivalent to the S&P 500. It is a stock market index reflecting the movement of the biggest companies in Japan.
The Nikkei futures contract, one of the most volatile indices on the globe, has seen selling pressure over the last year. After making a high last July close to 2100, the index sold off over 25% before seeing lows just under 14900 in early February. The index did see some relief in March, along with many other global indices as it rallied about 15%.
However, recent economic data and uncertainty revolving around negative interest rate policy has brought selling back into the Nikkei. The index currently sits at 15700, only 800 points away from 2016 lows.
If the index achieves new lows there is a good chance that fear will creep into global markets and the S&P 500 will sell off as well. Japan is an important piece of the global economy and the combination of a bearish market and a slowing economy will trickle into other markets.
How to Get Short the Nikkei
Japanese and American markets typically move together, but the Nikkei can have a mind of its own. If a trader desires to short the Japanese market in anticipation of lower prices there are a couple different options.
Below I list ways to play Japan through ETFs, currencies and stocks.
ProShares UltraShort MSCI Japan (EWV) is an investment seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the MSCI Japan Index. The fund invests in derivatives that ProShare Advisors believes, in combination, should have similar daily return characteristics as two times the inverse (-2x) of the daily return of the index.
If Japanese markets are up down 3%, this ETF will be up 6%. If Japan sees a rally this ETF will of course go lower.
CurrencyShares Japanese Yen ETF (FXY) is an investment seeks to track the price of the Japanese Yen, net of trust expenses. The fund seeks to reflect the price of the Japanese Yen.
The Yen currently moves inversely to the Japanese equity markets. Buying the Yen will be profitable if Japanese markets trend lower. Below is a chart that shows the inverse relationship of FXY to the Deutsche X-trackers JPN JPX-Nikkei400 (JPN), which tracks the Nikkei 400.
Canon Inc (ADR) (CAJ) is the popular Japanese camera and imaging company and is a Zacks Rank #4 (Sell). Canon’s extensive product line enables businesses and consumers worldwide to capture, store and distribute visual information.
Canon has a market cap of $32 billion and a forward PE of 15. The company pays a 3.84% dividend and has expected EPS growth of 3%.
On top of the trend of slumping Japanese stocks, the company is being challenge by new innovation and technology from competitors. The use of Smartphone cameras instead of traditional cameras will be a challenge going forward.
In addition, analysts are lowering estimates. Fiscal year 2016 has seen estimates drop from $2.09 to $1.92 over the last 90 days, a fall of 8%. The chart below shows us that Canon has been having trouble meeting streets expectations. The company reports on April 25th.
Kyocera Corp (ADR) (KYO) is a Zacks Rank #4 (Sell) that develops, produces, sells, and distributes industrial components, and telecommunications and information equipment worldwide. The company will be hit hard by potential threat of recession in Japan. Shares are already down 10% on the year.
Kyocera has a market cap of $15.5 billion and a forward PE of 20. The company pays a 0.85% dividend and has expected EPS growth of 1.56%. The stock sports a Zacks Style Score of “F” in Growht and a VGM score of “D”.
Estimates over the past 90 days have been coming down, with fiscal year 2017 falling from $2.43 to $2.09, a drop of 14%. The company reports April 27th where EPS will likely continue to trend downward.
Traders need to be watching the Nikkei. If new 2016 lows are seen again I expect the S&P to weaken and have a significant pullback. If this scenario plays out I would expect the volatility and volume seen earlier in there year to come back quickly.
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