Nikkei 225 Now Eyeing 10,000   

• Big investment banks and asset managers however continue to warn of an impending equity market correction. But the S&P500 has moved above its still-declining 200-day moving average and is so far holding in a trading range between 875 and 950. Dead crosses in the 50-day and 200-day moving averages for 30-Year treasury yields and the US dollar index are ominous signals, but the USD index is due for a short-term bounce from an oversold position.
• While global investors consider the Japanese stock market as essentially one big cyclical that is highly leveraged to the global economy, Japanese equities are reacting positively to basically the same factor supporting US equities and the commodities complex, i.e., excess liquidity. The Nikkei 225 continues to inch its way toward the 10,000 benchmark after seeing a golden cross in its 13-week and 26-week moving averages, and a tentative move above its 200-day moving average.
• In terms of supply-demand, there is an "air pocket" of cumulative trading volume between 9,500 and up to 15,000 on the Nikkei 225, meaning very little pent-up selling pressure for the time being.
• While activists and hedge funds have been selling Japanese stocks over the past quarter on the lack of earnings fundamentals and the assumption of a renewed appreciation in JPY, these positions have so far been painful, with the Nikkei 225 rallying from a March closing low of 7,021 to over 9,793 (39.5%).
• Bottom-up fundamental investors say stock prices have gotten ahead of themselves, but it appears that they have underestimated the impact of excess liquidity on stock prices. For our money, we remain "cautiously" long Japanese stocks, US stocks, and particularly emerging market stocks as well as commodities because of this excess liquidity. We do not believe that any interim correction as stock prices shift from excess liquidity to fundamentals will drag equity markets back to March 2009 lows or seriously derail what is slowly evolving into a sustainable rally.
• Moreover, still-high cash and defensive positions of large institutional investors may prevent prices from declining to what would be considered ideal re-entry points.

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