Stocktake

Tue, Feb 19, 2013, 00:00

Bulls/bears trade views on Nikkei

Japan’s economic and fiscal policy minister Akira Amari raised a few eyebrows recently when he said he wanted the Nikkei to hit 13,000 by the end of March.

The index, then trading at 11,150, has already risen by more than 30 per cent since November.

Policymakers will “show our mettle” and “continue taking steps to help stock prices rise”, the minister promised.

“Ponzi-based monetary policy,” scoffed market strategist and Pragmatic Capitalism blogger Cullen Roche.

Reuters’ Felix Salmon, however, said Japan was desperately attempting to break two decades of deflation; goosing the market could help do so.

Japan remains cheap, bulls add, with the Nikkei over 70 per cent below its 1989 peak and about 40 per cent below 2007 levels.

It may well hit 13,000 by March.

One month gains of 20.1 per cent, 16.3 per cent and 16.1 per cent were recorded in 1990, 1986 and 1994 respectively, so rapid gains are certainly possible.

However, Rory Gillen ( gillenmarkets.com) notes that the Nikkei is now almost 20 per cent above its 30-week moving average – something that has happened on only six or seven occasions during the past 60 years.

Conclusion? “Hold off investing in Japan until a correction occurs”.

US on a high as European markets far from peak

European and US indices have been stuck in secular bear markets since 2000.

However, the damage is much closer to being repaired in the US.

The Euro Stoxx 50 index, despite a recent surge, is barely half of its 2000 peak, even as the SP 500 and Dow Jones Industrial Average close in on all-time highs.

In fact, the Wilshire 5000 – a lesser-known index that tracks all US equities – last week hit an all-time high for the sixth time in the past 14 trading days.

For traders, however, the US climb has been a snooze. Bespoke Investment Group noted last week that the difference between the Dow’s intraday high and intraday low over the previous 13 sessions was just 1.35 per cent – the lowest 13-day spread in 26 years.

'Great rotation' overhyped

There’s been much talk about 2013 marking a “great rotation” out of bonds and into stocks. Last month, US equity funds enjoyed their largest monthly inflows in nine years.

But a Credit Suisse report last week warned that fund flows may be overhyped. The SP 500 more than doubled between March 2009 through 2012, the report noted, despite fund outflows of more than $400 billion. Seven of the 12 worst months of equity outflows happened in 2011/12, while there were only two weeks with inflows of $1 billion during that period. The years 2008, 2010, 2011 and 2012 saw the worst annual outflows (2008 was the only down year).

In addition, as the tech bubble burst in 2001 and 2002, when the SP 500 fell 13 per cent and 23 per cent respectively, US equity funds recorded inflows of $55 billion (2001) and “relatively minor” outflows of $23 billion (2002). Fund flows “aren’t statistically related to market returns at all”, Credit Suisse warned.

Correction on the cards

Investor sentiment towards risk assets is at a bullish extreme, raising the risk of a global correction in the coming months.

That’s according to Bank of America Merrill Lynch’s Bull and Bear index, which registered a reading of 9.6 (out of 10) last week – a higher reading than 99 per cent of all readings since 2002.

The index measures sentiment by examining hedge fund exposure, equity and bond inflows, market technicals and so on. Since 2002, readings of 8.0 or higher were followed by an average peak-to-trough correction of 12 per cent.

Such readings tended to be near market tops, with upside from the initial trigger to the subsequent peak averaging just 3 per cent. What’s more, the global economy is no longer surprising to the upside, and there is now a clear disconnect between economic data and investor sentiment, Merrill warned.

Buy after a downbeat conference call with CEO

If a chief executive appears downbeat during a conference call with analysts, it may just be time to snap up some shares in the stock.

A new study found company insiders are “significantly more likely” to sell shares following a positive conference call. And when executives used negative words, they were much more likely to buy over the following 30-, 60- and 90-day trading periods.

Perhaps executives reckon all the good/bad news is priced into the stock, and act accordingly? Unlikely. A previous study found that managers who want to buy shares tend to release negative news just before their purchases, so they buy on the cheap. The evidence, the authors conclude, “strongly suggests a strategic purpose behind saying one thing, and doing another”.

The study is iti.ms/Zd04yp.