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Tuesday, December 18, 2012 - 06:00
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Tuesday, December 18, 2012 - 06:00
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Tuesday, December 18, 2012 - 06:00

4 Black Swans That Could Jolt the Market in 2013

Tuesday, December 18, 2012 6:00 AM

If you think about a powerful creature plowing through the streets of Tokyo, then you probably think of Godzilla. However, I suspect there's about to be another type of powerful animal running through one of the world's greatest cities -- and that's a raging bull.

I've been watching Japan's economy closely for the past two decades for a number of reasons, but the main one is to see the effects of deflation on a country. Recent developments, however, have drawn me into a new thesis for the third-largest economy in the world -- and the equities pegged to its fate.

On Sunday, Dec. 16, the Japanese people elected Shinzo Abe as the new Prime Minister. Part of Abe's economic policy, which he has openly lobbied for during the past several weeks, is to have the Bank of Japan (BOJ) increase its inflation target to 2% or 3% from its current 1%. Given the inflation targets here at home, a small increase in the BOJ's inflation target actually represents a marked shift away from deflationary central bank policies to inflationary central bank policies.

You see, after 30 years of economic stagnation, and rewarding savings overinvestment (a result of a deflationary cycle), the winds of change are blowing through the Land of the Rising Sun. If a monetary policy change is put in place for the first time in a generation, then the Japanese people will be more incentivized to invest their capital rather than just plow it into Japanese government bonds. The result of what will amount to easier monetary policy will be the same as it has in this country, namely the value of the currency is likely to decline while Japan's equity market goes up.

My oft-cited colleague, Tom Essaye of The 7:00's Report, someone who also has been following the Japan thesis closely, put this sea change in Japan policy and its implications for Japanese stocks in the following bullish terms: "Think of it like being able to invest in the Dow before the first round of QE by the Fed (which depending on when you date the first QE was anywhere between a 30% to 60% rally ago)."

Tom almost always gets it right, and I think he's spot on once again. You see, Japanese stocks will be the beneficiaries as money is put to work in the space, and as Japanese export companies benefit from a weak yen.

As traders, we need to jump in front of this trend, and the best way to do just that is by allocating to an exchange-traded fund (ETF) that holds the biggest and best Japanese companies, but that also has a bit of currency protection.

The WisdomTree Japan Hedged Equity Fund (NYSE: DXJ) invests in some of the largest Japanese companies, but at the same time it hedges out the currency risk. That means you get the upside price appreciation I'm expecting on Japanese stocks, without the worry about a declining yen cutting into returns.

In recent weeks, we've seen heavy fund inflows in DXJ. One report cited an approximate $82.8 million dollar inflow over the past week, which is a 12.8% increased inflow week over week. The increased money flow into the space of late has created a big price surge in DXJ, and the fund now has blown past its 50-day and 200-day moving averages. I suspect that if Abe is elected, you'll see a continuation of this upward trend that could take DXJ well beyond its 52-week high.

Action to Take --> Buy DXJ at the market price. Set stop-loss at $31.65. Set initial price target at $40 for a potential 16% gain in two months.

Finally, keep in mind that political winds of change are forever fickly, and this whole thesis could unwind in the face of political opposition. However, it certainly seems like Japan is primed for a policy change, and a leadership change -- and that's a change that could translate into big money in your pocket.

This article originally appeared on TradingAuthority.com:
Don't Miss the Raging Bull That Could be Just Around the Corner in This Market

Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.