Outlook for the Nikkei average this week [8-January 2024]

 [Fundamental viewpoint]

In the U.S. market last week, stock indices fell for the week as profit-taking was seen at a time when long-term interest rates rose.

Weekly change NY Dow: -0.59% NASDAQ: -3.25% S&P 500: -1.52%.

                                                                                                 

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 4.98 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 21.2 and the Nikkei 225's P/E ratio of 14.9, 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 4.98 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 56.9, or if the Nikkei Index is around 127,850 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 94,470yen,

 

From a fundamental perspective, the Japanese market can be said to be about 94.470yen less attractive than the U.S. market. Weakness in 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's NYDow's weekly chart was a negative line. The daily chart is above the 200-day line and the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a negative 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 0.3 percentage points from three months ago. Profit growth was +8.5%, an improvement of +5.8 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 3.28 to 3.45, moving the dollar against the yen in the range of 140 to 145 yen. The dollar index rose +1.04% 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 fourth week of December and the first week of January were likely overbought, while this week is expected to be oversold. Last week, of the five points, ① was bearish and ③ was bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is undervalued by 5.6 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 1870 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 3.5 points (about 1170 yen in terms of the Nikkei average) undervalued in the medium to long term.

 

The undervaluation of the Japanese market relative to the U.S. market weakened during the week. The VIX, a measure of U.S. market volatility, rose to 13.4 for the week. The Nikkei VI rose to 18.5 for the week. Both the U.S. and Japanese markets showed increased caution.

 

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 +10.0%The divergence between the Nikkei 225 and the 200-day moving average was +6.2%. Since the three factor is positive, a "green signal" is lit for the medium-term trend.

 

In the U.S. market, the NYDow is below the 9-day line and above the 25-day line and the 200-day line. It is above Ichimoku Chart cloud.
The NASDAQ is below the 9-day line and the 25-day line and above the 200-day line. It is above the Ichimoku Kinko's cloud.
This is a "yellow 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 no trend. The Japanese market is in a medium-term up trend, and the short-term is no 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 144-147 yen range.

 

This week in the U.S. markets, the main focus will be on December inflation, followed by the release of producer prices and a speech by a Fed official. In China, consumer price index, producer price index, and trade statistics will be released. In Germany, data on manufacturing orders and industrial production will be released, and the unemployment rate for the Eurozone will also be in focus.

 

Last week, the Nikkei 225 moved mostly within its expected range. The upper price was about 70 yen above the assumed line and the lower price was about 210 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 33830 yen) on the upside and Bollinger Band -1σ (currently around 32820 yen) on the downside.

 

This week is likely to be another week influenced by the U.S. long-term interest rates and the movement of the U.S. dollar/yen. The Nikkei 225 is likely to have a difficult week for declines.