Technical Indicator Favors Japan Over U.S.

Japan bulls have one encouraging indicator: the Dow/Nikkei ratio, which finally seems poised to drop.

The Dow/Nikkei ratio is calculated simply by dividing the Dow Jones Industrial Average by the Nikkei 225. As the Dow outperforms the Nikkei, the ratio rises. As it underperforms, it falls.

From 1973 to the late 1980s, the ratio traded between 0.24 and 0.07, indicating the Dow was trading as a fraction of the Nikkei. That changed in the 1990s, when the Nikkei cratered and the Dow began a strong bull run. The ratio rose throughout the 1990s and even turned positive several times in the past few years, indicating the Dow was higher than the Nikkei.

Amid a strong recent performance for Japanese equities, it would appear that trend is poised to reverse.

To that end, I'm expanding my exposure to Japan. While more sophisticated investors might consider shorting U.S. stocks against Japanese equities, I'm content to simply add a few exchange-traded funds that hold Japanese stocks. Consider WisdomTree Japan High-Yielding Equity Fund (DNL), iShares MSCI Japan Small Cap Index Fund (SCJ) and SPDR Russell/Nomura Prime Japan (JPP).

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in many of the securities mentioned.