The Nikkei 225 Stock Average shed 1.8% in holiday-shortened trading last week. At 14,888.77, the N225 is trading at 15.9x forward earnings, 16.8x trailing earnings, 1.7x book and with a 1.36% forward yield (1.23% trailing).
Japanese stocks remain severely oversold, 65.6% A/D 25-DMA for TOPIX 1, but bearish factors continue to outweigh bullish ones. So, while stocks are due for a technical rebound and a potential boost from short covering, an extended rally is dubious.
Pascal Jeannenot of Japan Investments recently commented on suggestions in the financial press to play the N225 for a 10% 12m advance to 16,500, calling it an “uninspiring and desperate” strategy. I couldn’t agree more! To make matters worse, he notes there are some suggesting an N225 yield play, with the attraction being a paltry 1.3% being above its long term rate. Again, Pascal’s comments of this being a “poor prospect” are dead on! One of the key arguments in Barron’s recent bullish piece on Japan was the N225 yield inching closer to the 10-yr JGB.
That said, look for stocks to trade higher on Monday and early in the week following Friday’s strong performance in global equities, including a bullish half-day session in the U.S. on “Black Friday”. N225 futures in Chicago closed at 15,000 (+2.0%).
However, a stronger yen and continued concerns over the U.S. subprime mess and credit market turmoil leave stocks vulnerable to negative news and data releases. Depending on your situation, the current market may offer buy/accumulate opportunities or perhaps a short-term trade in the event of a year-end rally. Further downside is seemingly limited, but risk/reward on a broad basis is not exactly favorable.
Comments are closed.