Outlook for the Nikkei average this week [14-August- 2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indexes rose sharply for the week as the consumer price index for July came in below market expectations, easing inflation fears and reducing speculation of an accelerated rate hike by the Fed.

Weekly volatility NY Dow: +2.92%, NASAQ: +3.08%, S&P 500: +3.26%.

                                       

On the other hand, medium- to long-term risks include concerns about the prolonged conflict in Ukraine, energy costs, concerns about a slowdown in the global economy due to prolonged supply chain disruptions, and concerns about the bursting of the real estate bubble and economic slowdown in China. This also raises concerns about the advent of stagflation. Furthermore, we need to continue to pay attention to geopolitical risks in East Asia and the Middle East.

 

The difference in the yield spread between the Japanese and U.S. markets is that the Japanese market is 3.75 points cheaper than the U.S. market, considering the announced OECD nominal GDP forecast for 2023. The reason for the undervaluation is the difference between the S&P 500's PER of 18.7 and the Nikkei 225's expected PER of 12.9 or the current fiscal year, as well as the difference in interest rates and GDP growth between the U.S. and Japan.

This means that if the GDP growth rate difference between Japan and the U.S. in 2021 expands by another 3.75 percentage points compared to the OECD forecast (Japan is revised downward or the U.S. is revised upward), or if the PER of the Nikkei 225 stocks for the current fiscal year is about 25.0, or if the Nikkei 225 is about 55280 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 26730 yen in the medium to long term.

 

From a fundamental perspective, it can be said that the Japanese market is less attractive than the U.S. market by 26730 yen. The weakness of the Japanese market has been magnified.

 

[Conditions for Nikkei average rise]

In the future, the following assumptions are necessary for the Nikkei average to rise further.

①    Rising US market

②　Increase in profit forecast for the current fiscal year above the previous year's level

③ Further depreciation of the yen due to the widening interest rate gap between Japan and the U.S.

④ Upward revision of Japan's 2023 GDP estimate (now +3.5%) by OECD

⑤ Foreign investors over-buying

 

Looking at recent movements

①    Last week, the NY Dow weekly trend was positive. The daily footstep is under the 200-day line and above the clouds of the equilibrium chart. NASDAQ weekly trend was positive. The daily footstep is under the 200-day line and above the clouds of the equilibrium chart. This week, we will be watching to see if the NYDow can keep above the 25-day line.

②    As a result of the announcement of the quarterly financial results, the estimated ROE of the Nikkei225 index was 9.1%, an improvement of 0.4 percentage points from three months ago. In addition, the profit growth rate was +4.0%, an improvement of 5.0 percentage points from three months ago.

③    U.S. long-term interest rates rose and the interest rate differential between the U.S. and Japan widened from 2.67 to 2.69, but the dollar moved toward yen appreciation in the range of ¥135 to ¥131. The dollar index fell -0.85% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2023 is expected to be +3.54% for Japan and +4.88% for the U.S., so the Japanese market is 1.34 percentage points inferior in this aspect.

⑤    August 1 week was oversold; August 2 week was likely overbought; this week is expected to be overbought. Of the five points last week, ① was bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, the difference in 200-day divergence from the NASDAQ is relatively high by 6.4 points (about 1830 yen when calculated for the Nikkei 225) over the medium to long term. On the other hand, in terms of the difference in 200-day divergence from the NYDow, it is overvalued by 3.8 points in the medium to long term (about 1080 yen, which is calculated in the Nikkei 225).

 

During the week, the strength of the Japanese market relative to the U.S. market diminished. The VIX, a measure of U.S. market volatility, was 19.53, below the 20 mark, indicating a downward trend in investor sentiment.

 

The Nikkei 225 is above the 9-day line and the 25-day line. The short-term trend is "green".

The Nikkei 225 is above the Ichimoku Kinko Chart. The overall divergence was +13.2%, expanding the positive range compared to last week. The divergence from the 200-day moving average was +3.6%, expanding the positive margin. 3 factors are positive, indicating a "green light" for the medium-term trend.

 

In the US market, the NYDow is above 9-day line and the 25-day but below the 200-day line. It is above the clouds on the Ichimoku Kinko Chart. The NASDAQ is above the 9-day and the 25-day line but below the 200-day line. It is above the clouds on the Ichimoku Kinko Chart.

This is a "green light" in the short term and a "yellow light" in the medium term.

 

[Outlook for this week]

Looking at the U.S. market from a fundamental perspective, concerns about a slowdown in the global economy due to the spread of the new coronavirus, the lack of creditworthiness of banks in the EU and the political situation, the trade friction between the U.S. and China, and problems in North Korea have receded, but risk factors include Ukraine conflict, interest rate hikes in the U.S., rising long-term interest rates, rising oil prices, turmoil in financial markets due to the bursting of the real estate bubble and credit crunch in China, and geopolitical risks in the Middle East and East Asia.

 

Recent LIBOR rates have been on an upward trend and require continued attention. Even in March 2020, the LIBOR rate rose despite a decline in short-term interest rates, raising awareness of the possibility of renewed financial instability.

 

On the other hand, a positive factor is the maintenance of the Bank of Japan's monetary easing policy.

 

Looking at the technical aspects, the U.S. market is in a medium-term no trend and a short-term up trend. The Japanese market is in a medium-term up trend and a short-term up trend.

 

Analysis of the foreign exchange market shows that in 2020, the yen was moving in the direction of a gradual appreciation, but as we move into 2021, the yen continues to trend lower. This week, the yen is expected to be in the 134-130 yen range.

 

This week, investors will be reading the FOMC minutes carefully, speculating on whether or not the Fed's rate hike plans will change. Other scheduled releases include consumer price indexes for the U.K. and Canada. In the U.S., the August New York Fed business index and retail sales will also be closely watched.

 

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 200 yen below the assumed line and the lower price was about 340 yen above the assumed line. This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 28750 yen) on the upside and the 25-day line (currently around 27490 yen) on the downside.

 

Although selling pressure on credit is somewhat high, volatility is declining and the Nikkei 225 does not appear to be overheated, so there is still room for higher prices.