Japan illogic follows the panic

What do the following number pairs have in common?

+0.1 and -1.1
-0.7 and +0.1
+1.1 and +0.5
-1.8 and +1.5
+0.5 and -1.9

Hmm, not much it seems. The pairs represent the daily gain or loss in the iShares MSCI Japan Fund (symbol EWJ) and the next day’s Nikkei 225 Index results. You’d have to conclude from trading over the last week that the iShares fund, which trades during NYSE hours while Japan sleeps, has little or no predictive value for the next day’s Nikkei. And yet – there’s plenty of commentary today saying that weakness in the iShares fund right now signals a weak open in Japan tomorrow. Don’t buy it.

There are a few reasons to worry about the strength of the Japanese market for fundamental reasons, starting with the yen rally that will hurt exporters there, but the seemingly panic-fed sell-off the last few days smells ready for a short snapback. The fine analysts over at BCA Research smaller cap Japanese equities which aren’t dependent on export earnings. No iShares fund for small cap Japanese stocks yet but there are a few mutual funds.

p.s. yes, one week is a short time horizon, but my spreadsheet goes on for a year and the correlation doesn’t get any better.

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