Do you remember that song from the 1980’s called “Turning Japanese”? Great song performed by The Vapors. I wonder if Warren Buffett has been humming that tune lately, given his recent decision to move into Japanese equities? This, after his avoiding too much exposure to Japan for many years.
Berkshire Hathaway just announced that over the past year it acquired a little more than a 5% stake in five Japanese companies: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. Despite these seemingly large positions, they add up to only 1% of his Berkshire holdings. Should we be like Warren Buffett, and turn some of our portfolio Japanese? To answer that question, lets take a look at the weekly Nikkei chart.
The Nikkei chart suggests that the Japanese index may have a bit more room to go on the upside. There are a few things we should watch from a technical perspective as the index approaches a fairly significant level of resistance near 24,000. You’ll note on the chart that the Nikkei has had a fairly reliable sideways trading range between roughly 20,000 and 24,000. Beyond the COVID crash in March, the index has had only minor spikes outside of that range since 2017.
As we approach the 24,000 level (currently sitting at 23,000), we should keep an eye on the technical indicators that gave heads-up signals on the Nikkei in the past. The chart above illustrates the value of the MACD indicator to signal a move off of its lower and upper zones. I’ve only circled the upper zone signals, but you can observe the lower end signals on the chart by looking for oversold signals on the same 3 indicators. MACD’s crossover signal has been very accurate when occurring within overbought (or oversold) RSI and stochastics indicators. In fact, you’ll note that RSI and stochastics may be moving out of their overbought/oversold status a week or two before the MACD crossover. This is due to the lagging nature of MACD, which uses a differential between two moving averages rather than a raw price move comparison like the other two indicators. That lag seems to give MACD a more timely signal by filtering out some of the noise.
The Nikkei is currently overbought in the very near-term, as illustrated by the stochastics indicator on today’s chart. Mid-termed oscillators RSI and MACD are not overbought, and MACD is nowhere near a hook and crossover to the downside. As such, I’d suggest that the Nikkei has a good potential to reach 24,000 or even overshoot it a bit. Be mindful of the actions in these momentum oscillators, paying particular attention to the pattern of the MACD lines. Typical to Warren Buffet’s style, he is not one to view things with a neartermed view. As such, he has been known to happily own assets like Bank of America which has been flat since late 2016, and Mondelez, which was flat for nearly four years between 2015 – 2019. In other words, Buffett is probably going to be correct in turning part of his portfolio Japanese in the longer run. But there’s also a reasonable chance that the Nikkei will remain range bound for a while. While Berkshire (disclosure: we hold a position in BRK.B) may have patience for such a move, many investors might find it difficult to hold securities making little to no returns for multiple years.
We hold a smattering of Japanese equity exposure in our Equity and Aggressive Growth Platforms. But we aren’t convinced we should dive into that market with high conviction….. yet. Only a breakout that takes that index through 24,000 with conviction will signal a change to the recent trading channel. A pattern or trend must be assumed to remain until it proves otherwise.