Push Comes to Shove for Japan Equity ETF

Japanese stocks were a remarkably hot commodity among investors last week, according to the latest fund flows data (via Bank of America-Merrill Lynch). BAML reports inflows of $5.4 billion into Japanese equity funds during the week ended April 24, yielding their biggest one-week take since March 2018. That's not quite as monumental a figure as the $9.9 billion poured into global bond funds during the same time frame -- but it certainly places Japan's stock market head-and-shoulders above its peers.

At the same time that Tokyo-listed securities were drawing fresh interest, investors yanked some $6.4 billion out of U.S. stocks, $1.9 billion out of European equities, and another $900 million out of emerging markets. The net result? Some $4.4 billion in outflows for global equities, as investors continue to gravitate toward the "safety" of bonds over assets perceived as riskier.

If you expected the iShares MSCI Japan ETF (NYSEARCA:EWJ) to have benefited from the relative stampede into Japanese stocks, you would be completely incorrect. Data from etf.com shows that EWJ hasn't booked a single day of net inflows since April 15, and over the week ended April 24, investors pulled $157.08 million out of EWJ .That brings the fund's year-to-date outflows total to $2.19 billion (for perspective, its assets under management are around $14 billion).

And while EWJ has gained a respectable 9% since the start of 2019 -- thanks in part to the newly regained support of its 50-day moving average -- it's not difficult to see why investor enthusiasm is currently lacking toward this particular Japanese equity tracker. Since the very first day of April, EWJ has been butting its head unsuccessfully against resistance at the $55.50 level. This region has been a technical sticking point since it was breached to the downside during a late-October bear gap, and it has held firm as a technical ceiling this month despite multiple challenges by the shares.

Complicating matters is the arrival on the scene of EWJ's descending 200-day moving average, which was located at $55.53 at Friday's close. The shares gapped drastically below this benchmark trendline back in mid-June 2018, and in the ensuing months managed only one brief breakout above here before last fall's heavy selling took hold.

This chart scenario sets up a looming showdown between EWJ's 50-day and 200-day moving averages, which initially formed a "death cross" last July. Will support from the 50-day propel the shares higher, thereby forcing the trendline pair into a "golden cross" in the weeks ahead? Or will another rejection at the 200-day result in a continuation of the fund's long-term slump, with this latest rally simply producing another lower high to mimic October's?

Investors may yet be due for a bit more consolidation and coiling on the part of EWJ shares before we witness a big breakout one way or the other, as the island nation now begins a week-plus trading holiday. But in any event, the next update on Japanese equity flows should be illuminating, given that the aforementioned round of data directly preceded the central bank's Thursday decision to finally reveal an approximate duration for its ultra-accommodative policy stance.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, April 28.