Outlook for the Nikkei average this week [23-October 2022]

 [Present state recognition of fundamental]

Stock indices rose for the week in the U.S. markets last week as speculation that the Fed would continue to raise interest rates sharply to curb inflation receded somewhat.

Weekly change NY Dow:+4.89% NASAQ:+5.22% S&P 500:+4.74%.

                                       

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 4.63 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 16.6 and the Nikkei 225's expected PER of 12.5 and 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 4.63 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 29.4 or if the Nikkei 225 is about 63450 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 36560 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be less attractive than the U.S. market by ¥36560. The weakness of the Japanese market was magnified last week..

 

[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 the clouds of the equilibrium chart. NASDAQ weekly trend was positive. The daily footstep is under the 200-day line above the clouds of the equilibrium chart. This week, This week, we will be watching to see if the NYDow can hold 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 9.2%, an improvement of 0.2 percentage points from three months ago. In addition, the profit growth rate was +3.5%, an improvement of 4.6% 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 3.78 to 3.97, moving the dollar against the yen in the range of ¥151 to ¥146. The dollar index fell -1.26% 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    The October 2 week was overbought; the October 3 week was likely oversold; this week is expected to be overbought. Of the five points last week, (3) 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 11.3 points (about 3040 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 3.6 points in the medium to long term (about 970 yen, which is calculated in the Nikkei 225).

 

During the week, the strength of the Japanese market relative to the U.S. market decreased. The VIX, a measure of U.S. market volatility, declined slightly to 29.7, below 30, a sign of strong investor anxiety.

 

The Nikkei 225 is below the 9-day line but below the 25-day line. The short-term trend is "yellow light".

The Nikkei 225 is under the Ichimoku Kinko Chart's cloud. and the overall divergence is -3.5%, expanding from the previous week. The divergence from the 200-day moving average was -3.6%, expanding the negative margin. 3 factors are negative, indicating a "red light" in the medium-term trend.

 

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

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

 

[Outlook for this week]

Looking at the U.S. market from a fundamental perspective, concerns about a global economic slowdown due to the spread of the new coronavirus have receded, but risk factors include inflation and rising interest rates due to the Russia-Ukraine war and economic slowdown due to energy shortages and deteriorating political conditions in the EU, U.S.-China trade friction, financial market turmoil caused by the bursting of the Chinese real estate bubble and credit contraction, 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 downtrend and a short-term uptrend. The Japanese market is in a medium-term downtrend and is in a short-term struggle.

 

Analysis of the foreign exchange market shows that in 2020, the yen was moving in the direction of gradual appreciation, but has been trending lower since 2021. This week, the yen is expected to be in the range of 146-149 yen.

 

This week in the U.S., the focus will likely be on earnings reports, preliminary Q3 GDP growth, durable goods orders, and preliminary PMI readings. Also to be watched are central bank governors' meetings in the Eurozone, Japan, and Canada, as well as preliminary Q3 GDP growth figures for China, Germany, and France. Other preliminary PMI readings from the Eurozone, the U.K., Japan, and China will provide insight into economic activity in October.

 

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 370 yen below the assumed line and the lower price was about 280 yen above the assumed line. This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 27980 yen) on the upside and the 25-day line (currently around 26920 yen) on the downside.

 

U.S. stock indexes rose sharply over the weekend last week. Volatility declined slightly for the week. This week will be a test for the Nikkei 225 to break above the triangle.