Time for our weekly tick by tick of charts with Jordan Kotick, Global Head of Technical Analysis at Barclays.
Q - What does the Japanese investor think of the US recovery and the global recovery generally speaking?
A - They don't. They do not believe the worst is over, are generally very skeptical that any recovery is in place. Overall, based on their own experience, they do not trust the claims that a recovery is unfolding.
Q - But hasn't Japanese equities done quite well lately?
A - Indeed they have. In fact, Japanese equities generally speaking have outperformed US equities. Over the last few years, this relationship of which market has outperformed has ebbed and flowed. But as you can see, the trend of Nikkei outperformance vs the Wilshire Composite/broad market, which has been in play since November 2009 (ratio trending down) has further to go we believe.
Q - What are you watching specifically?
A - While the Nikkei mainly and the Topix (less so) have been throwing out bullish signals since Q1 2009, we have our eye on the Jasdaq. In Japan, this is often a leading stock indice and certainly one used to confirm equity direction. That it has been in a range for a decade, is testing the bottom of its range and threatening to turn higher is a potential sign of further Japanese equity outperformance.
Q - And yet, sentiment is still harsh on the global recovery? What do you need to see to suggest this sentiment in Japan is shifting?
A - Higher stocks matter but as always, the key often lies in the bond market. While markets generally lead the economy, markets can also act as thermometers of social mood. The prevailing market psychology in Japan of the "lost decade", deflation, low growth and demographic concerns (one of the fastest aging populations in the developed world), is keeping yields low and locked in a narrow 80 bp range over the last 5-6 years. While yields fell/ bonds were bought when stocks fell in
2007-2009 (squares on chart), investors have failed to sell bonds (yields higher) in the ensuing global stock market rally in 2009. Given that less than 10% of the JGB market is foreign ownership, this is one of many avenues to gauge ongoing investor psychology.