Part II: Long Japan, Short Emerging Markets

We update our post from May 9th where we suggested a defensive Long Japan, Short Emerging Markets trade. Since then, the spread between the two indices widened by over 10%. The market, as measured by the S&P 500 has gone essentially nowhere.

Ratio chart of EWJ: ADRE daily ("dollarized" versions of MSCI Japan and BoNY EM 50 Index):

Same chart weekly:

The trade still seems to have legs, but we will now highlight some additional defensive (re: negative beta spread trades) that appear to be in even earlier stages of development:

Long Japan, Short S&P MidCap 400 Value Index via EWJ/IJJ:

Long Japan, Short Russell Small Cap Value Index via EWJ/IJS:

Long Japan verus Russell 2000 Value Index via EWJ/IWN:

All of these trades have, or are beginning, to confirm long term trend reversals to the upside. These are long-term thematic reversals that should last for years to come.

Another idea that looks promising is long Japan, short U.S. High Yield:

Remember, we are not suggesting to go long the ebullient Nikkei. We are pairing EWJ, which is long Nikkei AND Yen, against higher beta shorts. The Yen is an historically defensive currency.