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Two Developing Major Market Trends

I think the odds are good that the incredible Japanese secular bear market in stocks has come to an end.

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Funds to Play Japan and Gold


In Cabot Wealth Advisories, I usually touch on some educational aspect to trading—money management, position sizing, market timing and so on. However, every now and then I like to write about a couple of big, long-term investing ideas that are on my mind; not stocks, per se, but major market trends that could produce huge opportunities in the months ahead.

These ideas don’t come very often—but today I have two! Please realize these aren’t meant to turn a profit next week; I believe these big moves could unfold over many years if things go right. They’re based on my background as a student of the market, combining charts, sentiment and fundamentals.

So what are these two developing major market trends? First, I think the odds are good that the incredible Japanese secular bear market in stocks—which began back in 1989 (!)—has come to an end. And second, I think the action of gold over the past two years is a sign that this commodity’s bull market may be over.


We’ll start with the first major market trend, in Japan. For those who don’t know, Japanese stocks had one of the biggest blow-offs of all time during the 1980s, with the Nikkei index (equivalent to our Dow Industrials) ripping from a low near 7,000 in 1982 to a peak of 38,957 at the end of 1989 ... a 26% annual return for more than seven years. That included an 83% melt-up during 1988 and 1989 alone.

And it wasn’t just the stock market; real estate was priced at ridiculous levels. Tokyo’s prime land sold for 350 times as much as comparable land in Manhattan, and the Ginza district saw properties sell for $20,000 per square foot (!). Imagine!

Of course, once the bubble burst, everything went south; the Nikkei imploded to 14,000 within a couple of years, gyrated for a few years, then plunged to 7,600 in early 2003. It did have a great rally from there, only to sink to 7,000 during the financial panic in 2008. That final decline made it 27 years of no net progress in the Nikkei. And the damage was similar in real estate, which declined by well over 50% and stayed in the basement for years.

However, it’s important to understand that long-term market crashes don’t just happen out of nowhere; sure, the market can dance to its own drummer for a few years, but not for 20. Japan’s been in a slump because of a slew of policy errors. And the most egregious of all those has been deflation—that is, not enough money chasing too many goods.

The deflation fed on itself because the Japanese banks were sitting on a ton of bad loans (mostly real estate debt), so the deflation made those debts worse; instead of being inflated away, falling prices effectively made those debts larger ... which, in turn, hurt lending, which caused more deflation, and so on. This has been going on for two decades!

Now, though, Japan is trying something extreme ... and I think it just might work. Its central bank, under new leadership, has implemented a quantitative easing program, purchasing bonds to flood the system with money and, most important, end the deflation. The new head, Haruhiko Kuroda, has vowed to do whatever it takes to hit the bank’s 2% inflation target.

So what’s different about this and what our own Federal Reserve is doing? Mainly the size and scope, and dedication to the program. The Bank of Japan has announced it will buy an amazing 70% of new bonds issued (the Fed is buying about 25% or so), and its purchases will amount to about 1.4% of GDP per month, more than twice that of the Fed. Moreover, unlike in the U.S., where some Fed governors are already looking to scale back the current QE program, in Japan, the Prime Minister’s economic advisor said this week there are more options available if this program doesn’t work, including the greater purchases of exchange traded funds and real estate trusts!

Now, don’t misunderstand me—I’m not saying that printing money solves the world’s problems. Frankly, I’m a bit skeptical of continuing that practice here in the U.S., where the financial sector is getting its act together (selling off bad loans, repairing balance sheets, etc.) and the housing market has turned up.

But in Japan, the problem (deflation) was clearly a lack of liquidity, which made the financial sector’s problems worse. Now, the central bank has made its primary mission to end the deflation come hell or high water. The flood of money has helped stocks accelerate higher, while the Japanese yen has tanked ... not a bad thing.

In short, I think the worst is finally over for the Nikkei and most Japanese stocks. That doesn’t mean there won’t be corrections, or that Japan won’t have hard times if the rest of the world’s stocks enter a bear market at some point. But I think the March 2009 low of 6,994 is likely to be the bottom for the Nikkei, with much higher prices ahead should the economy begin to recover and deflation prove vanquished.


My second thought about a major market trend isn’t as in depth as the first, but it could have more implications for the U.S. gold has been a dazzling performer since bottoming out in 2001; after many years of a strong U.S. dollar, the September 11 attacks opened the floodgates of higher Federal spending and lower interest rates from the Fed. Gold was around $250 per ounce back then, when it started to get going.

The rise kept going ... and going ... and going, with a couple of nasty corrections along the way. Of course, during that time, all commodities acted well, with oil, gas, copper and corn all skyrocketing. As U.S. stocks have stagnated since 2000, commodities have soared.

Now, however, I wonder if that trend is coming to an end. While gold prices haven’t collapsed by any means, they did top out back in 2011 at $1,895 per ounce and are currently fetching about $1,575 per ounce. That’s not out of line considering the nearly eight-fold advance since 2001.

But what’s caught my eye is that gold is hovering at 18-month lows while most of the headlines are still horrible! Since gold hit its peak, the U.S. nearly hit its debt ceiling, the eurozone has entered a mini-depression with numerous financial problems arising and, as mentioned above, the world’s central banks are all busy flooding the system with money. You’d think this would be a good time to own precious metals ... but instead, gold (and especially gold stocks) has been steadily trending lower for months.

Now, understand that I’m wary of calling ends to big bull moves; major tops often take a long, long time. So it wouldn’t surprise me to see gold advance for a few months at some point in the future, possibly into the $1,750 area; I would note that sentiment toward the yellow metal is currently very bearish, which often happens ahead of a bump higher. Gold could easily see a few weeks of higher prices relatively soon.

But long-term, my thought is this: If the price of gold can’t get going under these circumstances, what happens if the Fed eases up on its bond buying program? Or if the eurozone gets its act together? Or if the U.S. strikes a grand bargain that puts us on a more sustainable fiscal path? Any one of those could serve as a bearish catalyst that breaks gold to multi-year lows and effectively ends its secular bull market.


For investment ideas today, I’ll just stick with my theme and briefly highlight a few options you could use to play a new Japanese bull market, or a new downtrend in gold.

For gold, you can either watch the bullion itself, or the gold miners, which, just as a heads-up, do have a mind of their own—they can diverge (for good or bad) from gold itself in a big way. Just FYI.

For Japan, there are a few options. One is the MAXIS Nikkei Fund (NKY), which tracks the movement of the Nikkei in Japan decently. Another is the Japan iShares (EWJ), which is by far the biggest and most well-traded Japanese fund; it tracks the MSCI Japan Index. Either should do fine if Japanese stocks do well, but it appears as if neither hedges their exposure to the Japanese yen—said another way, if the yen declines, it hurts the value of these funds a bit.

If that concerns you, consider the WisdomTree Japan Hedged Equity Fund (DXJ). It’s a mouthful, but this fund does do some hedging of the Yen, which can be either good (if the Yen declines) or bad (if it appreciates). All three should do fine if Japan’s market does do well in the years ahead.

The most obvious way to play a gold bear market would be to short either the Market Vectors Gold Miners Fund (GDX) or the SPRD Gold Trust (GLD). These two provide direct exposure to the gold miners and gold bullion, respectively. If you want to get adventurous, you can always consider the Ultrashort Gold Fund by ProShares (GLL), which moves twice the inverse of gold bullion—though I wouldn’t say it tracks the metal perfectly. Expect lots of volatility with that one

Just to re-, re-, re-iterate, these aren’t meant as get-onboard-now recommendations; instead, they’re ideas that could blossom in the months ahead. I think it’s a great idea to keep an eye on the basket of funds above, or maybe do some nibbling as opportunities arise. I just see these two trends are possibly very early in what could be multi-year moves if things work out. Something to consider!

Until next time,

Michael Cintolo
Editor of Cabot Top Ten Trader
and Cabot Market Letter

A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.