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Last week turned ugly for Japanese stocks as the yen strengthened, hurting exporters, and there was profit-taking, putting downward pressure on previously hot stocks.

The 28 Japanese ADRs listed on the NYSE or trading on the Nasdaq had an average return of -3.8% last week (compared to +0.5% and +4.2% in the two weeks prior).

Only three ADRs finished the week higher: NIS Group (NIS) +8.2%, Makita (OTCPK:MKTAY) +2.0% and Konami (KNM) +1.1%.

The five worst performing ADRs:

    1. Nomura (NMR) -12.2%
    2. Kubota (KUB) -8.3%
    3. FUJIFILM (FUJI) -7.3%
    4. Advantest (ATE) -7.3%
    5. Orix (IX) -6.1%

The best way to understand the current situation for Japanese stocks is to recognize there is nothing fundamentally wrong; however, Japan is neither isolated, nor insulated from the global economy and capital flows. That means Japanese market participants are being led by action in New York, as always seems to happen when the market is weak. When Japanese stocks are strong, it typically means there is a lot of foreign money flowing in, even if the market in the U.S. is not so hot. We witnessed this in Japan's latest rally. The problem is when foreign money leaves, for whatever reason.

My thoughts for this week are don't be in a hurry to buy, be selective and be patient.

Disclosure: The author owns shares of NIS and IIJ and owns IIJ call options.

See the following chart for the weekly returns of the 28 Japanese ADRs.

Click to enlarge chart

Wkly-Japan-ADR-0223-0302

Source: Japan: Best and Worst Performing ADRs Last Week