The underlying picture of the broader Japanese equity space presents a different picture than the 30-year high reached by the Nikkei 225 Index earlier this week.
The Japanese equity market has been back in the news over the past week, as the Nikkei 225 Index, the country’s oldest and most prominent cap-weighted benchmark, rose to a chart level of 27600, marking its highest level since 1989. Similar to the S&P 500 Index in the US, the Nikkei 225 includes the 225 companies with the largest market capitalization on the Tokyo Stock Exchange. While it is certainly noteworthy to have the Japanese benchmark making new multi-year highs, the underlying picture of the broader Japanese equity space presents a different picture.
The relative strength picture of Japan can be seen on the NDW country index matrix ranking, which has the NDW Japan TR Index NDWNQJPT ranked 26th out of the 43 country indices examined. Japan has actually been significantly higher over the past 12 months, as the country benefited from the general resilience of Asian economies amid the global pandemic and rose to a rank of 5th at the end of May. However, that relative strength was short-lived, as the index fell to the 20th position by the end of the next month. In looking at the historical matrix rank for Japan over the course of the past five years, we can see that high rankings are relatively rare as it has spent the vast majority of the time in the bottom half of the rankings. As a refresher, these country rankings are split off into quartiles, with the top quartile viewed as “buy” areas of international equity markets, the second quartile viewed as “hold” areas, and the bottom third viewed as the less favorable, “sell” countries. Based on the current ranking in the bottom half, Japan would not be viewed as a favorable area of investment for international equity exposure.
Another way to view the strength of equity markets is through participation, which we typically examine through bullish percent charts. We frequently mention bullish percent readings for major domestic equity indices, however, they are also available for international equity markets. In order to view any technical indicator for an international equity region, simply navigate to the Technical Indicator Reports page and change the country/region you are examining in the upper left-hand area of the platform. Doing this for Japan reveals the Bullish Percent for Japan BPTO-TO, which represents the percentage of the roughly 2,000 stocks we track on the Tokyo Stock Exchange that are trading on a current point & figure buy signal. This reading reached a multi-year high of 86% in June of this year and has moved largely lower since that time. The chart most recently reversed back down into a column of Os last week and currently sits at 54%.
It is generally viewed as a negative sign for equity indices to be reaching multi-year highs while the overall market participation is declining, as is the case with Japan. In order to dive deeper into how the movement in the BPTO-TO has related to Japanese equities, we have split off the indicator chart readings into quartiles and measured forward returns for the Nikkei 225 Index based on what quartile and column we found the chart. We ran this data based on the full history of the Bullish Percent for Japan indicator, dating back to the beginning of 2003. Interestingly enough, we can see that the Bullish Percent for Japan has actually spent the majority of trading days in the second quartile on the chart, ranging from 50% to 75%. Most of these days find the chart in a column of X's, however, there have still been roughly 14% of the trading days since 2002 where the chart has been in a column of Os in the second quartile, where it is currently positioned. The average forward price return for the Nikkei 225 Index NK225-OK is actually the weakest looking out 1 week, 1 month, and 6 months from any combination of quartile and column when the bullish percent is at these levels. It is also the second-worst average when looking at forward 3 month and 12 months returns for the Nikkei 225 Index. When thinking intuitively, these averages are not all that surprising, as we might expect weaker returns when the market participation in Japan is declining towards the 50% level, rather than remaining at an elevated position or potentially improving from washed-out territory. While the picture for Japan certainly has the potential to improve as we move into the New Year, the current relative-strength and participation readings do not point toward this being the case initially. It should also be noted that these averages based on historical readings near the current chart positioning were not all that negative, so this is not meant to say that we should expect a major downturn in Japanese equities in 2021. Rather, we might be ready for a continuation of stagnated underperformance in the broader Japanese equities space, as has been the trend for most of the past several years.
