A historic surge in new highs for Nikkei 225 members

Key points:

• The percentage of Nikkei 225 stocks registering a 4-week high surged to the highest level in almost a decade
• After similar thrusts, the bellwether Japanese index was higher 83% of the time over the following two weeks
• Currency-hedged Japanese ETFs exhibit the highest relative trend scores versus the S&P 500

Japanese stocks are soaring higher

The Nikkei 225 continues to exhibit bull market characteristics with consolidations followed by impressive upside breakouts.

After consolidating for six months, the bellwether Japanese index broke out this week to a 34-year high. Participation was spectacular, with more than 79% of index members registering a new 4-week high, reaching the highest level in almost a decade.

Similar expansions in 4-week highs preceded positive returns 

Whenever the percentage of Nikkei 225 members registering a 4-week high exceeds 70%, the bullish price momentum is likely to continue in the near term, with the index rising 83% of the time over the subsequent two weeks. Over the following year, the Nikkei was higher in all but two cases. The only signal to mark an immediate top occurred in 2011 when the Nikkei was mired in a lengthy downtrend.

How can we participate in Japan?

In my previous research notes, I recommended the WisdomTree Japan Hedged ETF (DXJ) due to the currency hedge overlay, which attempts to mitigate the impact of severe moves in the Yen. 

The distinction between currency-hedged and non-hedged ETFs becomes apparent when examining relative trend scores and year-to-date returns. ETFs employing currency hedging outperform their counterparts on a YTD basis and show superior relative trend scores.

I would continue to stick with hedged ETFs. 

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Big picture

The consistent stair-stepping pattern in the Nikkei 225 is a textbook example of the type of breakouts that traders dream about.

What the research tells us...

The percentage of Nikkei 225 members registering a 4-week high surged by one of the most significant amounts in history. After similar breadth thrusts, the momentum in the bellwether Japanese index will likely continue in the near term and over the subsequent year. With the Yen starting to weaken again, investors should favor currency-hedged ETFs.