23rd May - Buy the Nikkei at these cheap levels
28 May 2013
TECHNICALS:
Nikkei WEEKLY CHART
The market looks to have paused at the band of resistance from the Prior Lows (also note the coincident Fibonacci resistance).
A large monthly bear Key Reversal has occurred.
But in the first place, the market has stopped at the 23.6% Fibonacci retracement support
Nikkei DAILY JUN13 CHART
On the daily short-term chart the pull back is clearly in massive volume.
It has tested the immediate horizontal support from the Prior High at 14040.
FUNDAMENTALS:
Since the change of government in December 2012, the Nikkei has enjoyed a solid rally, with only one notable set back in early April. The driving force behind the rally has been the economic policy of Prime minister Abe who has installed a new Governor at the Bank of Japan, sympathetic to his views on how to re-invigorate Japan’s economy.
A central plank of this policy is a much weaker Yen, intended to help Japan’s exporters compete against rivals such as China. It is no surprise then that the decline of the Yen has coincided with the rally in the Nikkei.
The Bank of Japan Governor has sought to play his part by targeting an inflation rate of 2.0% as mandated by the present government, against a current national CPI rate of -0.9%.
Clearly after two decades of deflation, moving CPI up from its current negative reading to 2.0% year on year represents a challenge. The Bank of Japan set about achieving the target by announcing a doubling of the country’s monetary base by purchasing government bonds.
Clearly this more aggressive monetary policy was like pouring petrol on a fire and the Yen extended its rally, touching 16,000 earlier this week, before a sizeable correction set in driven by two factors:
These comments were latched onto by traders fearful of the day the Fed turns off the monetary policy taps. But Bernanke wasn’t delivering an early warning to the markets about the Fed’s imminent intentions. No, his message was that the economy would need to gain a firmer footing and enter a self sustaining recovery, which it hasn’t yet achieved.
So why have stocks, especially the Nikkei sold off? Is the rally over? Have investors concluded the market had gotten ahead of its self?
We don’t think so. Clearly traders/investors were very long of equities, especially the Nikkei. So as soon as a correction set in, there was a rush to lock in profits and this compounded the sell-off.
In our view nothing has changed. The conditions that allowed the Nikkei to rally are still in place. The Fed is still committed to buying bonds at the rate of $85 Bn. a month until the US economy can stand on its own feet. It can’t yet.
The Bank of Japan is committed to hitting its inflation target of 2.0% CPI in two years and the Japanese government is determined to revive the economy’s growth outlook through among other policies: a weaker Yen.
In short, the sell off is a correction and offers a good buying opportunity. Anyone who missed out going long of the Nikkei in the initial bull phase now has a second chance and we think it should be taken.
The wall of money the Bank of Japan and US Federal Reserve are throwing at their economies may ultimately cause inflation, but for the moment that risk is remote. Those cash injections need to go somewhere. Equity markets respond well to massive liquidity injections.
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23rd May - US Dollar Index Nearing Long Term 76.4% Retracement