Friday, March 18, 2011

Japan... Buying or Selling Opportunity

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Last weekend, I was riding the chairlift my ski friend Don and he asked/stated that it seemed like a good time to short the Japanese stock market. My response was that I would rather look for the panic buying opportunity. I think that struck him as odd. Let me explain.

When major news, earnings, economic, geopolitical, etc. hits, there is typically an immediate reaction in the financial markets, and many times an overreaction. Think of the initial shock of the event. Apple blows out on earnings and the masses all want to get onboard. Unemployment comes in much worse than expected and everyone wants to sell. Lunatics fly planes into buildings. I think you get the picture.

Once the news is in the public domain, there is no longer an edge. All of the available news is factored into the market, at least for the time being until the situation takes a big turn. Intuitively, most investors react to news and investor with the news, i.e. selling into bad news and buying into good news.

After 23 years in the business, I don’t have all the answers and still have loads of question, but I have learned to buy when no one else wants to and sell when it seems idiotic to do so. Sometimes, I am early and other times I am spot on. But I live to invest with the minority. In more technical terms, it’s called mean reversion; buying into weakness and selling into strength.

So after my conversation with Don last weekend, let’s say you wanted to sell short the Japanese or even the U.S. stock market. We can use the exchange traded fund (ETF) that Ishares has on the MSCI Japan Index. It closed at 10.80 into the weekend as you can see from the chart below.

But it’s now Sunday and you would have had to sell short at Monday’s opening price, 9.86. At that point, the ETF was down 8.70% for the day and 15.21% since the peak. For me, that’s an awful lot of price to give up in order to put a trade on. Now, if the events in Japan ended right there, the ETF would have likely rallied, but if things got out of control, the ETF would likely head much lower.

As you can see from the chart below, Japan did head lower right at the open Tuesday morning to 9.32, but closed the session above 10. And as I write this Thursday evening, it closed the day at 10.10.

It’s still too early to know the final outcome, but from my seat, I would rather look for signs of panic selling to buy in to than try to hop on board a moving train that’s long left the station.

I vividly remember the events after 9-11, waiting for the markets to reopen. When they finally did and I was looking to buy, that first down day of roughly 500 points saw very little panic. It was probably the most orderly 500 collapse in history! I went home that night with a bad feeling that serious pent up selling was coming. And although I was looking to commit cash and buy, I was still sitting on investments that would certainly get hit in the coming days.

In that case, it took about five trading days for true panic to set in, coincidentally as I was on my second bachelor party trip in two weeks. Waking up in Wisconsin to find the early indication of the Dow down another 500-700 points was definitely unsettling! But it also smacked of real despair and investor capitulation. You could have shorted our market any time during those first five days and you would have been ok for a few days. But once the market turned, stocks launched higher more than 20% in just a few short months. Again, I would rather digest the news, wait for my spot and go against the crowd.

FYI, I will be on CNBC’s The Call on March 24 at 11:05am.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

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