Happy New Year & Nikkei analysis

Quite a few days have passed since my last post. That’s what end-of-year vacations are for right? Anyway, I didn’t miss much action, or at least there was no real surprise.

The Japanese index started a selloff on the last trading day of 2014, right before the traditional 5-day “o-shôgatsu” vacation. There was probably some profit taking after an amazing year which saw the Nikkei jump 7.2% (1159 points). But there might be more.

Over the last few weeks, this market has been characterized by its lack of motivation, with very low volume constantly falling (volume fell from 1.932 billion shares traded on Monday 22 to 1.666 billion 3 days later).

On the chart, the Nikkei has made a lower high on December 25 at 17 950, and is now bouncing on its ichimoku cloud and monthly support around 16 600, making a higher low – maybe to get stuck in a consolidation pattern-. ADX at 18 shows again an important lack of conviction in this market. Again, 18 300 is the pre-Lehman crash high of 2007, which also was a double top and a RSI divergence -on a monthly chart- with the previous high of April 2006. With such low volumes, there is no way that the Nikkei can break above this.

Why are volumes so low, and can they climb again? 

Non-domestic investors are net sellers of Japanese equities in 2014. This year saw foreign investments into Japanese stocks fall 94% compared to 2013, which was the first year of Abenomics. Two facts to illustrate how big this is:

• Purchases by foreign investors were less than a 10^th of what they bought in 2013, making it the smallest amount since 2008.
• In April 2013 alone there was 3 times as much foreign investment in the Japanese stock market as all of the year 2014.

So who is still buying Japanese stocks?

Not individual investors. They have been net sellers for 4 consecutive years.

Data shows that, despite a weak yen making the Japanese market cheap, only domestic  trust banks and pension funds are buyers.

This can be understood as investors not believing in Abe’s super-short-term vision anymore, even though they did enjoy the party in 2013. So, unless Abe shoots his last arrow in the coming months, there is little chance to see foreign investors back in the game. The burden of keeping the Nikkei and Topix rising has to be borne by Japanese pension funds only.

If you look at 2014, it seems that Japanese banks and funds have had no problem lifting both the indexes. As foreign demand was drying up, Abe was filling the gap with state and pension-fund investments. The GPIF (the world’s largest pension fund) has more than double its allocation for domestic shares (according to Bloomberg, that translates into buying another ¥10 trillion of Japanese stocks), and the BOJ expanded its already huge asset-purchasing program, tripling investments in exchange-traded funds to about ¥3 trillion a year.

What this really shows is that Abe has no credibility but a lot of monetary power. But to what extent? As a reminder, his strategy to stimulate inflation is to pump endless amounts of cash into the stock market and to raise consumption tax. Can the Japanese government expand its QE program again and ask the GPIF to buy even more stocks? If they can’t, they will have to think of something on the long term: Abenomics  is supposedly made of “3 arrows”, namely monetary easing, fiscal stimulus and structural reform. The latter is still a no-show.

Anyway, trading-wise we are entering a period of consolidation with anemic volumes. There is absolutely nothing to trade here at the moment. Just wait and see if the Japanese index breaks above 18 100 or below 16 400.