Outlook for the Nikkei average this week [21-January 2024]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices rose for the week on expectations that the use of AI will boost corporate earnings and a soft landing for the U.S. economy.

Weekly change NY Dow: +0.72 NASDAQ: +2.26% S&P 500: +1.17%.

                                                                                                 

On the other hand, medium- to long-term risks include concerns about the prolonged conflict in Ukraine, energy costs, financial instability and global economic slowdown due to rising interest rates, and the collapse of the real estate bubble and economic slowdown in China. This also raises concerns about the arrival of stagflation. In addition, geopolitical risks in East Asia and the Middle East continue to require attention.

The difference in the yield spread between the Japanese and U.S. markets is 4.62 points undervalued in the Japanese market when the revised OECD nominal GDP forecast for 2025 is taken into account. The undervaluation is due to the difference between the S&P 500's P/E ratio of 21.5 and the Nikkei 225's P/E ratio of 15.9, the difference between the U.S. and Japanese interest rates, and the difference in GDP growth rates.
This means that if the difference in GDP growth between Japan and the U.S. in 2022 is 4.62 points larger than the OECD forecast (Japan is revised downward or the U.S. is revised upward), or if the current year's forecast PER of the Nikkei Index stocks is around 59.3, or if the Nikkei Index is around 134,370 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 98,400yen,

 

From a fundamental perspective, the Japanese market can be said to be about ¥98,400 less attractive than the U.S. market. Weakness in the Japanese market was somewhat 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's NYDow's weekly chart was a positive line. The daily chart is above the 200-day line and the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a posittive weekly line. The daily price is above the 200-day line and the Ichimoku cloud. This week, we will focus on whether or not the NY Dow can keep above the 25-day line.

②    As a result of the announcement of quarterly financial results, the forecasted ROE of the Nikkei 225 indexes came in at +8.8%, an improvement of 0.2 percentage points from three months ago. Profit growth was +8.5%, an improvement of +6.1 percentage points from three months ago.

③    The U.S. long-term interest rate rose and the interest rate differential between Japan and the U.S. widened from 3.37 to 3.47, moving the U.S. dollar against the yen in the range of 144 to 148 yen. The dollar index rose +0.78% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +3.4% for Japan and +3.9% for the U.S., so the Japanese market is 0.5 percentage points inferior in this aspect.

⑤    The second week of January was overbought, the third week of January was likely overbought, and this week is expected to be overbought. Of the five points last week, ①, ③ and ⑤were bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 0.3 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 110 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 3.4 points (about 1220 yen in terms of the Nikkei average) overvalued in the medium to long term.

 

The Japanese market turned overvalued relative to the U.S. market. The VIX, a measure of U.S. market volatility, rose to 13.3 for the week. The Nikkei VI declined to a weekly low of 20.7. The U.S. market remains optimistic and the Japanese market remains overheated.

 

The Nikkei 225 is above the 9-day and the 25-day lines. This is a "green light" for the short-term trend.

The Nikkei 225 is above chimoku Kinko Chart's cloud, and the Nikkei 225's total divergence is +28.2%The divergence between the Nikkei 225 and the 200-day moving average was +12.6%. Since the three factor is positive, a "green signal" is lit for the medium-term trend.

 

In the U.S. market, the NYDow is above the 9-day line and the 25-day line and the 200-day line. It is above Ichimoku Chart cloud.
The NASDAQ is above the 9-day line and the 25-day line and the 200-day line. It is above the Ichimoku Kinko's cloud.
This is a "green light" in the short term and a "green 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.

 

Looking at the technical aspects, the U.S. market is in a medium-term up trend and a short-term up trend. The Japanese market is in a medium-term up trend, and the short-term is up trend.

 

Analysis of the foreign exchange market shows that the yen has been turning toward appreciation since November 2023. This week, we expect the yen to be in the 143-146 yen range.

 

This week in the U.S. market, investors will be most interested in the fourth quarter GDP growth, PCE price index, and personal income and spending. In addition, durable goods orders, manufacturing and services PMIs, and new and temporary home sales will also be in focus. Earnings announcements from industry giants such as Microsoft, Tesla, J&J, P&G, Netflix, Intel, T-Mobile, Verizon, Abbott, and IBM will be in full swing. Globally, interest rate decisions will be made in the Eurozone and Japan. Manufacturing and services PMIs will also be in focus in Japan, the Eurozone, and the U.K.

 

Last week, the Nikkei 225 moved within its expected range. The upper price was about 80 yen below the assumed line and the lower price was about 530 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 36120 yen) on the upside and the 25-day line (currently around 33940 yen) on the downside.

 

Volatility in the Nikkei 225 remains high, so the Nikkei 225 is likely to continue rising this week.