If you listen very carefully, you’ll be able to hear the sound of investors in Asian stocks holding their collective breath. Trading’s been very quiet in the $4.8 billion iShares MSCI All Country Asia ex Japan ETF (AAJX), a fund which gives over nearly 18 percent of its portfolio to Korean stocks.
By quiet, I mean the exchange trading fund’s trading range has been shrinking ever since a top formed in January. As time passes, the highs have gotten lower and the lows have gotten higher in the seeming denouement of a six-month, head-and-shoulders formation.
And now everybody’s waiting to see if the Trump-Kim summit on-off switch gets flipped again.
Remember when the announcement of U.S. intentions to pursue a face-to-face meeting first put the switch in the “on” position back in March? Asian stocks were propelled upward on the news. Then, just before the Memorial Day weekend, we were in the dark again as the U.S. pulled back from the summit. Asian equities, to no one’s surprise, reeled in reaction. But that, apparently, wasn’t the end piece. As we prepared to grill our holiday hot dogs and burgers, speculation of a rapprochement bloomed as an outgrowth of a surprise meeting between Kim and South Korean President Moon.
It’s not just AAJX that’s exhibiting signs of fibrillation amidst all this. Similar patterns can be seen on the charts of the iShares Asia 50 ETF (AIA) and the iShares MSCI Emerging Markets Asia ETF (EEMA). Fully a quarter of AIA’s heft derives from Korean stocks; for EEMA, the figure’s 21 percent. The technical picture of the iShares MSCI South Korea Capped ETF (EWY), made up exclusively of Korean issues, is comparable but also exhibits a bearish breakdown from an intermediate-term wedge pattern. Still, all these ETFs are trading above the necklines in their head-and-shoulders formations, indicating the bearish pattern isn’t yet complete.
Here’s the deal: A relief rally becomes likely if the summit switch gets flicked to “on.” We can expect selling pressure to mount if the switch remains “off.” If we listen carefully to Mr. Market, he’s been trying to tell us he’s gearing for a bearish patch, putting a $61 to $62 price, long-term objective in sight for AAJX. From today’s price near $77, that would be a 20 percent decline. There’s a near-term price target at the $67 level on a neckline break.
But (there’s always a “but,” isn’t there?), with two volatile principals driving the summit process, nothing’s certain.
There’s a play here that allows you to be on both sides of a potential breakout. A straddle or a strangle—created by buying both puts and calls on AAJX—affords open-ended profit potential on a dramatic move up or down in AAJX’s price, but limits your ultimate risk to the cost of both options. The range-bound market’s generally cheapened AAJX’s option market, making such option purchases more attractive.
Straddling a fence, most of the time, isn’t a wise idea. But now, with respect to Asian stocks, straddling may be your safest choice.
Brad Zigler is WealthManagement’s Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange’s (now NYSE Arca) option market and the iShares complex of exchange traded funds.
