Japan & India look like the best part of Asia; Both buyable
Key Takeaways
- Minor early week setback doesn’t take away from ongoing Equity bounce
- Can US Equity index bounce avoid the June Swoon? Early June better than late June
- Japan and India look like the best part of Asia, and both technically attractive to buy/own
The minor pullback from early in the week hit initial key support at 4070 on Wednesday before attempting to snap back higher. This allowed for both “legs” of this pullback to be equal in price terms, and often an important area to consider as support. Overall, there hasn’t been sufficient weakness to proclaim that this bounce is over. Heading into the final two days of the week, the area at Wednesday’s lows will be important, which lies at 4073.85. Under that might briefly allow for a move to 4031, but it’s right to stay bullish unless 3982 is broken, for SPX cash or Futures. Conversely, movement back above 4128 would be encouraging, and any progress back over 4167 is a green light towards thinking this rally extends up near 4285-4325. Despite the push up in Treasury yields, it’s right to stay bullish on US Equity indices, expecting more out of this bounce in early June unless proven otherwise.
Can the Equity bounce be derailed by the June Swoon?
June has not been historically kind to US equity markets, despite the last five June’s finishing with positive returns. When looking back since 1871, we see the average June in Mid-term Election years has been down -0.6%, far worse than the month of June during Non-Midterms.
The years directly related to 2022 based on cycles tend to be 2002, 1982 and 1962. Specifically, the 20-year and 60-year cycles both had dramatically poor performance, lower by more than -7%.
It’s my technical view that the first part of June will be better than the back half following the June FOMC meeting. Given the near-term structural improvement, and better participation, I’m betting that markets rally into mid-month, and then likely retrace, given the difficult seasonality.
Here’s the Average Return during June in Mid-term Election years
This table below shows that June tends to be far worse during mid-term election years, and only the second worst month behind September in years of this sort. Thanks to Fundstrat’s own Ken Xuan, here is data going back since 1871.
Overall, I don’t think this bearish data means it’s right to disregard the recent stabilization and outperformance in Equal-weighted Technology and Financials. Yet, I feel that post FOMC, we’ll likely see far worse back half of June then first couple weeks. At present, my own technical analysis suggests that until/unless 3982 is broken, that the upward trajectory for this Equity bounce remains intact, and it’s right to be long.
Both Japan and India look like excellent places to invest in Asia
NIKKEI showing resiliency and appears close to a technical breakout
While much of the conversation these days tends to center around China, it’s important to pay attention to those countries whose Equity markets have held up in resilient fashion during this 1st half pullback. Japan and India are two countries which come to mind, which have fared substantially better than US indices thus far in 2022.
Charts of the NIKKEI 225 have formed a minor (ABC) Elliott style correction in recent months yet have not faltered materially as much as many other indices globally. Prices as of 6/1/22 remain -10.85% off 52-week highs, much more resilient than the NASDAQ Composite which is down more than 26% from 52-week highs.
It wouldn’t take much to cause this entire consolidation from February 2021 to give way to an upside breakout, and help this pattern resolve to the upside. Specifically given the weakness in the Japanese Yen in recent days vs US Dollar, this looks to be a real possibility sooner than later.
Daily closes above March 2022 highs of $28,338 would constitute a breakout of the pattern going back since last February. This should result in prices pushing higher initially to test $30,795, but I suspect Japan fares much better given its weakening Yen. A slow climb back to $35k and then to test all-time highs at 38,957 is a likelihood on an intermediate-term basis. While a move like that will take time, technical charts of the NIKKEI 225 show this to be very well positioned to continue higher. Furthermore, this looks far stronger than US Equities. Therefore, for investors looking to diversify outside of the US, Japan looks attractive here and will become more attractive when the NIKKEI can climb above $28,338.
Japanese Yen breakdown looks important, and positive
Below is the chart of the US Dollar vs Japanese Yen, shown in the popular USDJPY cross. This massive long-term breakout has little real resistance until 2002 highs, made 20 years ago near 135. Given this week’s progress in the US Dollar turning back up sharply vs Yen, I’m expecting this to push back to new monthly highs in the near future.
While quite overbought, the structural progress means more than overbought momentum as a reason to want to expect further weakness in Yen vs the Dollar in the weeks and months to come. My belief is that this should represent a tailwind for Japanese Equities.
India also looks appealing technically
While completely different in many ways, the charts of the NIKKEI and the Indian BSE Sensex (SENSEX) look strikingly similar on weekly charts. Both are down roughly 5% for 2022 (SENSEX lower by -11.03% below its 52-week highs) The consolidation is a bit shorter in the SENSEX than in the NIKKEI but both have shown sideways patterns after lengthy runups.
In the last few days, SENSEX made its move to exceed the near-term downtrend from mid-April. This is a bullish development technically and should drive this back to challenge and likely exceed all-time highs.
Bottom line, investors could play either one of these country’s Equity indices via ETF’s such as DXJ or HEWJ for Japan, which offer exposure to Japanese Equities while neutralizing the impact of the falling Yen. EWJ is the traditional IShares MSCI Japan index fund, though does not offer any currency hedging.
For India, the choices are plentiful, but investors might consider ETF’s like INDA, EPI, INDY, or SMIN as ETF”s which could allow exposure to India, while focusing on various cap styles according to preference.
