Record Highs In The Nikkei… [Dirty Dozen]

Feb 26

Written By Alex M.

“We are great believers in the idea of having audacious goals, breaking out and doing something out of the ordinary… It’s helped us turn what most people consider a mere profession into a vocation and, beyond that, an art, where we frequently put ourselves in harm’s way." ~ The Chandler Brothers (the greatest investors you’ve never heard of).

In this week’s Dirty Dozen [CHART PACK] we walk through the market's trifecta and argue that the weight of the evidence still favors the bulls. We then look at the new all-time highs in Japan’s Nikkei, a long DAX trade, and a coming opportunity to add to our long BTCUSD position, plus more…

1. The Qs are trading in a short-term volatile sideways range within a broader uptrend. They’re now in a Bull Volatile SQN regime. This regime tends to coincide with tops, though markets can continue higher in BullVs for some time before a top occurs.

2. Market internals for the most part remain supportive of the primary uptrend. But, the negative divergences in QQQ/SPY and VIX 3m/1m that we pointed out last week need to be watched as this type of action tends to precede selloffs — though any selloff is likely to be shortlived until we see broader weakness across the internals.

3. Sentiment is bullish but not consensus enough for a top call.

4. Long Nikkei is our largest position and has been our best-performing trade year-to-date. We pitched this trade back in early Dec 23’ (link here).

5. It’s overbought at roughly +3.5std above its 200dma and +2std above both its 50 and 20dmas. But overbought conditions aren’t a great contrarian signal as overbought markets tend to become more overbought. So they’re often more a sign of accelerating momentum than a precursor to mean reversion. The opposite is true in oversold markets which do tend to precede reversion to the mean.

Speculators remain quite bearish considering the price action and while seasonality is poor over the next 2-3 weeks, it turns strongly positive on March 19th.

6. Last month we highlighted the Nikkei’s Breadth Thrust with 70% of the stocks on the making 4 week-highs. This particular signal has a mean return of 11% and sees positive 12m forward returns 77% of the time.

7. The Nikkei just made its first new all-time high in 34 years. And new all-time highs tend to cluster, meaning new all-time highs are followed by more new all-time highs.

8. This record high is also coinciding with a new 52-week high in price.

9. And whenever we see new all-time highs and 52-week highs occur simultaneously, the Nikkei’s mean return a year later is 25% and 100% of the time is positive.

10. The German DAX broke out of its sideways trading range this past week.

11. BofA thinks that “producer” indices such as the DAX should perform well since they expect ISM to begin inflecting higher in the months ahead. They write:

“US consumer strong past 12-18 months, global producer weak…see contrast between payroll & ISM (Chart 6); roles set to reverse in coming quarters…global PMIs tentatively indicate inflection higher as orders now outstripping inventories (Chart 7), while consumer tailwinds of excess savings extinguished, falling saving rate (now <4%), rising delinquencies (albeit low) & hiring slowing; all cyclical assets now trading inflection point in ISM; based on historical relationship to ISM and current valuations, best trades for “long producer, short consumer” in '24 are commodities, mercantilist stock indices (KOSPI/OMX/DAX) & EM ex-China, cyclical assets not yet trading ISM jump to 55-60.”

12. We pitched the long BTCUSD trade in these pages early last November (link here). It’s now consolidating in a tight sideways compression and we should see a bullish breakout soon. We’ll be adding to our long on a daily close above this range (note: we’re long through the leveraged ETF BITX).

It’s also nice to see that speculators continue to sell into this rally.