The Turn in the Nikkei 225 Looks Sustainable   

• Investors in the main have been pleasantly surprised by the strength of the recent rally in global equities, and they are even willing to look at the abysmal economic data as a cup half full rather than half empty.
• The $0.97 print on Citigroup's stock was a turning point, marking the point of maximum bearish sentiment. Since then, a surprising move by the Fed to add additional stimulus, the announcement of the still-controversial PPPIP (bank rescue plan) and initial hints of a bottoming in economic activity have added impetus to stock prices.
• Japan's stock market, already declining for about a year before the US and overseas markets peaked, has seen prices fall over 60%. What initially looked like dirt cheap valuations imploded as Japan's exports, production and economy literally fell off a cliff. The Nikkei 225 P/E multiple has swung from a trailing 9.9X to a forward 104.7X, and earnings yield has imploded from 9.1% trailing to 0.8%. As a result, market capitalization of Tokyo Stock Exchange's (TSE's) first, second and Mothers markets has imploded by JPY311.29 trillion ($3.2 trillion), to JPY266.8 trillion from a peak of JPY578.09 trillion in June 2007.
• Yet Japanese stock prices over the past two weeks have continued to rally despite still-shocking economic weakness, encouraged by signs of increased stability in overseas markets, a weak yen, and signs of recovery in China. The weak yen in particular has propelled auto and electronic sector stocks.
• Since foreign investors dumped a record (i.e., the most in 19 years) amount of Japanese stock in 2008, they are now very underweight Japan, and will become increasingly nervous once the Nikkei 225 sees a golden cross in its 13-week and 26-week MAs.
• This leads us to conclude that; 1) the trough in Japanese stocks has already been seen, 2) stocks are beginning to see light at the end of the economic tunnel, and 3) there is plenty of BOJ and government stimuli as backing for a more meaningful rally in the Nikkei 225?to as high as 12,000 or pre-financial melt-down levels. International blue-chip auto and electronic stocks should continue to lead this move.

< Go Back to List