The US bull market is aging, but Japan's new bull run looks likely to extend into 2017, with investors citing renewed faith in Abenomics and other factors. Big banks and funds are moving money from US equities to Japan. It's a good time for Nadex traders to trade the lively Nikkei.
By Vikram Rangala
Tuesday, November 29, 2016
The end of the calendar brings any number of look-back lists and look ahead prognostications. Even though investment banks and brokers operate on the fiscal calendar, they still issue reports and recommendations around this time. A November 27 report from Morgan Stanley agreed with an earlier assessment by Nomura Holdings, Inc., Japan's largest brokerage, that the bull run in Japanese stocks which began in summer 2016 is likely to continue into next year.
We won't quote the specific predictions about how much the Nikkei is likely to grow, because the importance for short-term traders is not that the market may rise, but that more investors and traders are taking interest in it. That means more volume and more buying and selling. That in turn leads to volatility, which means opportunity.
Earlier this year, Morgan Stanley had advised buying US and emerging market equities, citing cheap credit as a favorable factor. With the uncertainty about an upcoming Fed rate increase and a change of US administrations, Morgan is now advising investors to reduce their credit exposure and shift their buying to shares in Europe and especially Japan.
Earnings in Europe have shown some improvement. In Japan, earnings per share have expanded faster than in any other part of the world. Cynics (including me) would say that EPS is always easy to reduce by buying back shares using cheap money, which the BOJ has made abundantly available.
By doing so, you shrink the denominator in earnings per share, making yourself look better even when earnings underperform. US firms drew heavy criticism for using bailout money and other windfalls for share buybacks instead of investment and job creation. Whether or not the number is significant in this case, one look at the Nikkei's long-term chart and the difference compared to US stocks is clear: a strong upsurge and still nowhere near all-time highs.
Technical analysts will notice that it is nearing a 61.8% retracement of the slide that took place in the year prior to the re-election of Prime Minister Shinziro Abe's coalition in July. The weekly chart shows a double-bottom formation. A clear break above and through the 61.8% mark, a key level for traders who use Fibonacci retracements, could be considered a bullish signal.
Whether the earnings expectations pan out or the technical signals prove to be predictive is still anybody's (educated) guess. Some analysts are going further afield with speculation about what effect possible US infrastructure spending and corporate tax cuts might have on global earnings growth. In the meantime, policies in Europe and Japan are already taking effect and appearing to show results. Again, the key point is not what direction any market will go, but that with the spotlight on Japan will come more trading volume and volatility.
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