Outlook for the Nikkei average this week [13-November 2022]

 [Present state recognition of fundamental]

In the U.S. markets last week, stock indices rose on the week as the growth in the U.S. CPI for October came in below market expectations, raising awareness that inflation has peaked out and the Fed is expected to ease off on interest rate hikes.

Weekly Change NY Dow:+4.15% NASAQ:+8.10% S&P 500:+5.90%.

                                       

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 4.38 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 17.7 and the Nikkei 225's expected PER of 12.9 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 4.38 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 64620 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 36360 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 36360 yen. Weakness in the Japanese market narrowed 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 above 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 but in the clouds of the equilibrium chart. This week, we will focus on whether or not the NASDAQ can move above the 200-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 0.1 percentage points from three months ago. The profit growth rate was +6.9%, an improvement of 2.4 percentage points from three months ago.

③    U.S. long-term interest rates declined and the interest rate differential between the U.S. and Japan narrowed from 3.92 to 3.58, moving the dollar against the yen in the range of ¥147 to ¥138. The dollar index fell -3.95% 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 first week of November was overbought; the second week of November was likely overbought and is expected to be overbought this week. Last week, of the five points, ① and ⑤ were bullish and ③ was bearish.   ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, the difference in the 200-day divergence rate from the NASDAQ is 11.0 points (about 3110 yen when calculated for the Nikkei 225) higher in the medium to long term. On the other hand, the difference in the 200-day divergence from the NYDow is 0.2 points (about 60 yen when converted to the Nikkei 225) higher in the medium to long term.

 

During the week, the strength of the Japanese market relative to the U.S. market decreased. The VIX, which indicates the volatility of the U.S. market, declined to 22.5, below the 25 level that indicates investor anxiety. The Nikkei VI fell to 20.3.

 

The Nikkei 225 is above the Ichimoku Kinko Chart. The Nikkei 225 is now above the Ichimoku Kinko's Kumo (equilibrium) cloud. The Nikkei 225's divergence from the 200-day moving average is -0.5%, a smaller negative divergence than last week. The divergence from the 200-day moving average is +10.2%, expanding the positive margin. 3 factors are positive, indicating a "green light" for the medium-term trend.

 

In the U.S. market, the NYDow is above the 9-day, 25-day, and 200-day lines. NASDAQ is above the 9-day and 25-day lines but below the 200-day line. The NASDAQ is above the 9- and 25-day lines but below the 200-day line.

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 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 the rise, and we continue to be wary of a resurgence of 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 is in a short-term up trend.

 

Analyzing the foreign exchange market, the yen has been trending lower since early 2021, but has turned stronger since November. This week, the yen is expected to be in the 137-140 yen range.

 

Retail sales, producer prices, and housing data will be among the most important economic indicators to be released in the U.S. this week. Investors will also be watching for earnings reports from major retailers and the state of the crypto market after FTX, a major exchange, filed for bankruptcy. Other areas of interest will include inflation rates in Japan, the U.K., and Canada, as well as the U.K.'s proposed budget. Also to be released will be data on German business confidence, Japan's third quarter GDP growth, China's industrial production, and retail sales.

 

Last week, the Nikkei 225 moved above its assumed range. The upper price was about 180 yen above the assumed line and the lower price was about 190 yen above the assumed line. This week, the Nikkei 225 is expected to move between the Bollinger Band +3σ (currently around 28610 yen) on the upside and Bollinger Band +1σ (currently around 26770 yen) on the downside.

 

Volatility in the U.S. declined during the week last week and stock indices rose sharply. This week, the Nikkei 225 is likely to move between the rising Bollinger Band +2σ.