Japanese Stocks Return to a Sense of Normalcy   

• The Nikkei 225 index is back above the 10,000 mark for the first time in eight months supported by a return of foreign investor buying and individual investor average daily trading values that are double the lows at the height of the financial crisis.
• Even Japan's long-suffering consumers are feeling less apprehensive, as consumer surveys for May showed the fifth month of improvement from a December low. The stock market rally and multiple government stimulus packages are having a positive effect on consumer sentiment,  even though the job picture and the summer bonus situation is bleak.
• The fact that the Nikkei 225 has seen a golden cross between its 13-week and 26-week moving averages, and is now back above its 200-day moving average is evidence that this rally is more than a mere "dead cat bounce". Top-down, the ongoing rally in commodities is also supportive of the Nikkei's rally, as the factors (such as China demand and excess liquidity) are the same factors supporting Japanese stock prices. Consequently, Japanese stocks are now solidly in a "buy on weakness" mode, and foreign investors that were dumping truckloads of Japanese stocks in late 2008 remain significantly underweight Japanese equities.
• While hedge funds in general have been shorting the rally in Japanese stocks, this strategy has so far been painful, as value investors are selectively buying in big lots, as are the sovereign wealth funds. At some point, the pain on these short positions will cause a noticeable uptick as continue market gains shake out these short positions.
• While it is too early to tell whether this will be a false "W"-shaped recovery and real concerns remain about the pace of the rally to date vis-a-vis Japan's ability to maintain a real economic recovery as opposed to a brief government stimulus-instigated bounce, stock prices continue to react well to the second derivative, i.e., the momentum of improvement from Q1 calendar 2009.
• The other negative assumption, i.e., a renewed strengthening in the yen, also appears to have fizzled amidst a continued deterioration in the Yen index.

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