Diary of a Financier

Anatomy of a momentum boom/bust: Japan’s NIKKEI

In Capital Markets on Tue 30 Jul 2013 at 10:05

While Japan’s NIKKEI 225 ($NKY) had bounced after its May/June correction, it failed to recapture the May highs and is now fading back toward lows again. These wild undulations reminded me of many other boom/bust momentum darlings in years past, so I started studying historical precedents to see how today’s NKY might proceed.

In studying Apple’s ($AAPL) famous collapse back in March, I found analogues throughout recent and distant history:

“To construct a baseline scenario [for AAPL], I studied the chart of other such momo darlings, like CMG, LULU, OPEN, PCLN, and even Crude Oil (CL/)… In the end, one fallen angel distinguished itself as a suitable analogue for AAPL: Green Mountain Coffee Roasters (GMCR).”

Using the same methodology, I find that today’s NKY shows the same chart formations. Further, in combing comparisons, I determine that China’s Shanghai ($SHGIDX), which began a bear market in 2007, is a best fit model for today’s NKY, which itself peaked in May. The weekly indicators and pricetrends are a tight fit:

SHGIDX v NKY weekly

SHGIDX v NKY weekly

The biggest difference is the shorter timeframe over which NKY has rallied in comparison, but momentum is a function of slope, and both the Shanghai and NIKKEI exhibit requisite steepness.

I crunched some statistical data to determine where NKY might bottom were it to continue down SHGIDX’s path. The Shanghai retraced 87% of its cyclical bull rally during the bear market of 2007-08. The equivalent in today’s NIKKEI terms would put NKY’s downside target at 9,150 (-33% from yesterday’s close).

Now, I have to acknowledge that just searching for analogous momentum crashes is an exercise in confirmation bias. It’s hard to imagine such carnage, as the denunciation of Abenomics would call all of the global, post-Keynesian experimentation into question. I have more work to do on this, but I had to post these observations, because I’d do myself an injustice if I didn’t report what I see, as I see it.

As if a reflex, my first objection to the above hypothesis was the coming fiscal stimulus Abe promised to jolt CapEx in Q3/Q4… then again, I’m sure the market expects it too and has discounted the effect by now… or maybe Abe knows the market knows…

I last reviewed Japan’s technicals/fundamentals here, and macro here.

~~~~

We’re barely above water in our $DXJ position, which we built throughout the June pullback. Sony ($SNE) is one of our largest singlename equity holdings, so I’m evaluating whether or not to trim the position (+50% gains) for both idiosyncratic and portfolio management purposes.

–Romeo

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  1. Update 2…

    Now that Japanese companies have saved enough to hit their cash targets, they plan on spending on CapEx, dividends & higher wages.
    #Bullish (but priced-in?)
    http://www.bloomberg.com/news/2013-08-04/toyota-s-37-billion-cash-pile-means-turning-point-for-abenomics.html

  2. Update 3…

  3. Update 4…

  4. […] in July, I noticed a familiar chart pattern developing in Japan’s NIKKEI index.  I was reminiscent of numerous […]

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