Nikkei Weekly Outlook: Profit Taking Concerns

What to watch: Monday and Tuesday, May 19-20: Bank of Japan [BoJ] Monetary Policy Meeting; Tuesday, May 20: Monthly Report of (May) Economic and Financial Developments [BoJ]

Ongoing: Earnings season is in the home stretch; 150 announcements are scheduled for Friday (less than 50 are scheduled for the week of May 26); It goes without saying that external factors will continue to impact domestic stocks, however record oil and yen hovering around the ¥105 level have not stopped the Nikkei’s recovery of 14,000.

Markets: June Nikkei 225 futures in Chicago were off 25 points on Friday, settling at 14,350, compared to a close of 14,260 in Osaka.

The Bank of Japan is widely expected to hold the benchmark rate at 0.5%. More importantly, market participants will pay attention to commentary from BoJ Governor Shirakawa.

Aside from the BoJ, oil and yen, there is growing concern that elevated technical levels will induce profit-taking. In recent weeks we’ve mentioned the closely watched 25 DMA of Topix-1 advancers/decliners, which ended last week at 121.1, compared to a 112-level reading two Friday’s ago and a near 120 reading three weeks ago. In spite of 55% of Topix-1 issues closing in the red on Friday, there were 175 new highs compared to only 3 new lows. Another matter with negative implications for equities is stock dividend yields are poised to slip below that of the 10-year JGB. While some profit-taking is expected, trading in recent weeks suggests any selling early in the week can be recouped by week’s end.

Key earnings this week include:

• Monday, May 19: T&D Holdings (JP: 8795)
• Tuesday, May 20: Capcom (JP: 9697)
• Wednesday, May 21: Asics (JP: 7936), Sompo Japan Insurance (JP: 8755), Millea Holdings (JP: 8766) (ADR: MLEAY.PK)
• Friday, May 23: SQUARE ENIX (JP: 9684)

Weekly recap: The Nikkei 225 gained a solid 4.1% to 14,219.48 last week, climbing as high as 14,393 on Friday, versus a weekly low of 13,541 on Monday. The Nikkei recouped 14,000 mid-week and held on for its first 14k-plus close since May 2nd. TOPIX 1st Section ended the week up more than 3% to 1,395.87. It exceeded 1,400 intra-day Thursday and Friday, but the last time it closed above 1,400 was January 10th.

As of Friday’s close the N225 is trading at 16.1x trailing and 16.9x forward earnings, 1.64x book, 1.45% trailing yield and 1.54% forward yield. By comparison, the broader TOPIX (1st Section) is trading at 17.3x trailing and forward earnings (slightly cheaper on a trailing basis), 1.53x book and 1.7% trailing and forward yield.

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