Japan's stocks fell for a fourth day straight Tuesday as the yen strengthened against most major currencies, cutting the earnings forecasts for exporters.
IShares MSCI Japan Index (EWJ), the most popular ETF tracking the island nation, gave back 1.48% to 9.63.
That's while the iShares MSCI EAFE Index (EFA), tracking developed foreign markets, skidded 0.68% to 56.83.
SPDR S&P 500 (SPY) let up 0.47% to 145.29.
iShares MSCI Emerging Markets Index (EEM) dropped 1.05% to 44.18.
EWJ is trading high above its 50- and 200-day moving averages, indicating it remains in a solid uptrend. Declines the past four days so far can be considered a normal pullback in an uptrend. It has performed on par with EFA recently, gaining 5.32% in the past month and 7.67% the past three months vs. 4.11% and 5.98% for EFA over those periods. Japan has lagged global markets in all time periods, including its mere 0.9% return for the past 15 years.
EWJ carries an IBD Relative Strength Rating of 51, which means it's outpacing half the market and underforming half. It has a strong IBD Accumulation-Distribution Rating of B+, suggesting institutions are buying considerably more shares than selling.
Japan stock funds, which posted their biggest annual inflow last year since 2005, absorbed $474 million the first week of the year, according to EPFR Global.
CurrencyShares Japanese Yen Trust (FXY), measuring the yen against the dollar, gapped up 0.64% to 112.47. FXY collapsed 10% over the past three months as Japan's new government embarked on a course to debase the currency to boost exports. The inflationary policy is aimed at lower borrowing costs.
On Tuesday, FXY appeared to be staging an oversold bounce off of a 2-1/2-year low. A strong currency reduces the value of the foreign earnings for Japanese exports.
Alec Young, global equity strategist at S&P Capital IQ, sees clouds forming over the land of the rising sun and recommends investors should sell out of Japanese stocks.
Young wrote in a report released Tuesday:
"The island nation's export reliance gives it above-average currency sensitivity, with every shift in the yen's value having an above-average impact on this influential equity market's performance. The daily correlation between Japanese equities and the dollar-yen exchange rate is 87%. This stems from large export manufacturers in the IT, industrials and consumer discretionary sectors comprising roughly half of Japan's total equity market cap.
"When the yen is strong, U.S. dollar returns are boosted by positive currency translation only to see it eroded by poor underlying equity performance in the face of a weakened export outlook. Conversely, a weak yen tends to drive above-average equity gains as export prospects brighten, only to have negative currency translation dilute dollar-denominated Japanese equity performance. U.S. investor returns suffer when overseas currencies fall vs. the greenback.
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