Cashing In on Sentiment Extremes in the Yen


They say patience is a virtue, but when it comes to the markets, patience has been an absolute necessity. This is especially true of Japan.

On 1/23/13, amidst all the Abenomic hysteria, I wrote an article entitled, "Is it Time to Buy the Yen?" 

Continue Reading Below

That article highlighted the extremely bearish sentiment that accompanied a quickly falling Yen and rising Japanese stock market (NYSEARCA:EZJ). 

Our ETF Technical Forecast focused on the setup by saying, "The Yen's sentiment is out of control and hit a 5 year low this past week.  The key is to wait for the technicals to confirm."

The best way to profit from sentiment trades is to wait for the technical trend to change before jumping on the eventual Yen (NYSEARCA:FXY) bottom.  That trend change occurred the week of 5/27 as the Yen reversed into a 10% rally.

5 Months Later and Still Extremely Bearish Sentiment

If you perform a search for "Abenomics", the first link retrieved discusses the inflationary economic policies of Shinzo Abe and how it is negative for the Japanese currency (NYSEARCA:DXJ).  This is the general consensus, and having an entry in a popular online encyclopedia concerning your new inflationary policies is no doubt a sign of an extreme in sentiment.  Pretty much everyone expects Abenomics to create runaway inflation.

In the meantime, the equities kept rising, the Yen kept falling, but the sentiment measurements we discussed in January not only remained extreme, they got worse!  

Even though the Yen was falling off a cliff, the commercial hedgers (smart money) kept getting longer and longer, the speculators (dumb money) kept getting shorter and shorter, and investment surveys (trend followers) kept getting more and more negative.  These data points combined with the mainstream encyclopedia entry and general consensus showed an extreme in Yen sentiment which helped warn that a Yen bottom was near.

The shift back from extremes in all these sentiment measures have now helped drive the Japanese stock market (NYSEARCA:EWJ) down almost 20% from its top, including the huge 7% (NYSEARCA:EWV) intraday decline of 5/23.  A similar move in the opposite direction occurred in the Yen. 

The Yen Trend Change                                                              

The sentiment extremes combined with the technicals provided a high probability profit setup for the Yen.

The chart below was one of a few provided with commentary to subscribers in our February ETF Profit Strategy Newsletter article, "Jawboning Japan", that identified the Yen setup and signals to watch that would confirm an eventual trend change.

The above chart (go to to see enlarged version) was first published to our readers when FXY was trading at $109, but by waiting for the technicals to align with the extreme sentiment we were able to get a much better entry a few months later. 

When FXY was trading down at $96.85 in May it was very close to a technical trend change and was alerted to subscribers.  "FXY can be bought with a weekly close beyond the trendline".  On 6/2 when the Yen was at $97.46 I followed it up with, "The weekly Yen has triggered a buy signal on its breakout.  The expectation is for the Yen to now see at a minimum a few weeks of buying as extremely bearish sentiment is relieved." 

FXY rose over $5 in two weeks, up over 5% from our entry with the also suggested Ultra Yen (NYSEARCA:YCL) up over 10% in under a month.

The Yen's extreme sentiment was in place all the way back in January and a warning that the Yen short was very one-sided and ripe for a powerful trend change.  Waiting for a confirmation from the technicals was all that was missing.

That confirmation finally occurred in late May and is proving that patience is indeed a virtue as the Yen relieves the overly extreme bearish sentiment. 

The ETF Profit Strategy Newsletter monitors global events and formulates high probability trades based on fundamental, technical, and sentiment research.  We have moved our stops on the Yen up to breakeven after taking some profits and monitor it as well as many other ETFs each week in our Technical Forecast. 

Follow us on Twitter @ ETFguide