Japanese Stocks Mixed in Monday Trading -- ADR Watch List

With all the economic data releases these days, it's increasingly hard for Japanese stocks to gain traction as market participants more closely scrutinize the data. Overall, Japanese stocks got off to a good start, especially domestic-demand plays, but exporters are another story.

I sold off my various call option positions in iShares Japan ETF (EWJ) late last week. In hindsight it seems it was a smart thing to take profits -- 58% total gained including transaction costs over 1 week of trading -- but who knows how favorable the positions will be on/near expiration day. Note N225 December futures sold-off ¥90 to close at ¥16,240, compared to today's N225 close of ¥16,303.59 (-¥18.19, or -0.11%).

I maintain my stance on a strong year-end finish in Japan but see the Nikkei 225 Stock Average ending the year at no more than about 16,500 now. Downside-wise, which I've estimated to be around 15,500, is probably closer to 16,000.

The more important index to watch is the TOPIX, which is broader, and is often referred to as more "bank-heavy," compared to the "exporter-heavy" N225. Domestic demand stocks look more favorable given a strengthening yen and also due to the risk of a slowing US economy. However, the TOPIX is somewhat hard for U.S. investors to play, even with the iShares TOPIX/S&P 150 ETF (ITF), since ITF represents 1/10th of the TOPIX 1st section and its top holdings resemble EWJ's, while lacking the trading liquidity of the latter. TOPIX closed today at ¥1,607.74 (+¥2.84, or +0.18%). TOPIX futures lost ¥5.50 to close at ¥1,601.

I still expect there to be heavy volatility in the main Japanese indices and futures trading this week due to the expiration of futures and options contracts and also the machinery order data release this Friday, and the forthcoming BoJ tankan (short-term economic survey of business) release, followed by its rate decision meeting on the 19th. There's also speculation Q3 GDP could be downward revised in an updated release this Friday.

I am still skeptical whether such volatility will improve liquidity and pricing of EWJ options. All I can say is I am ready to accumulate both call options and shares (via a Japan mutual fund and individual stocks I own), if there is any unwarranted (excessive) selling.

Correction: ADRs trading at discount/premium were reversed.

ADRs to watch today that trade at a discount to their ordinary shares based on prior ADR close vs today's ordinary close:

NIS Group (NIS) +6.78%, ¥63 close ($5.44 ADR equiv. at 115.75/$1), -6.10% ADR discount
ORIX (IX) +2.07%, ¥32,000 ($138.23), -3.88%
Wacoal (WACLY) +1.05%, ¥1,545 ($66.74), -2.27%

ADRs trading at premium based on prior ADR close vs today's ordinary close:

NEC (NIPNY) -1.96%, ¥551 close ($4.76 ADR equiv. at 115.75/$1), +1.65% ADR premium
Honda (HMC) -1.48%, ¥3,990 ($34.47), +1.12%
Nissan (NSANY) -1.42%, ¥1,393 ($24.07), +1.11%

iShares MSCI Japan Index ETF (EWJ) 1-year chart:

Disclosure: The author owns shares of NIS Group.