High Probability of Nikkei Breakout

After being one of worst-performing and most unloved markets in the developed world this year, the Nikkei in Japan is on the verge of being thrust back into the spotlight.

The Bank of Japan is set to unveil additional stimulus tomorrow to cap off the surprise announcement earlier this week by Prime Minister Shinzo Abe of a larger-than-expected fiscal package. We believe this coordinated action will stem the almost $10 billion in net Japanese exchange-traded fund (ETF) outflows this year and may even attract some fund flows back.

The positive recent election results for Abe also gives us comfort as investors interested in Japan’s stock market. We now know that Japan’s prime minister has the full support of the country’s people to continue to implement his policies of invigorating the equity market while devaluing the yen. For us, however, we see the potential for short-term profits.

When you receive this alert, buy the exchange-traded fund (ETF) ProShares UltraShort Yen (YCS), which last traded at $65.23, and buy to open the iShares MSCI Japan (EWJ) September $12 calls (EWJ160916C00012000), which last traded at 20 cents.

YCS is an ETF that is effectively shorting the yen. Simply put, when the yen moves lower due to devaluation, YCS will go higher.  With this paired trade we look to profit from both a move lower in the currency and a move higher in Japanese equities.