Nikkei Weekly Outlook: Resiliency or Reluctance?

What to watch: Thursday, May 29: U.S. Revised Q1 GDP; Friday, May 30: CPI for April (May for select metropolitan areas); April - Industrial Production; April - Household income and expenditure survey; April - New housing starts; April - Unemployment and Ratio of Job Offers to Applicants

Ongoing: Commodities and forex volatility — more inflation reporting chicanery. Protectionist tendencies may be pressured by a report (and the realization) of $3.2 billion in cross-shareholding losses in FY2007, as well as greater urgency from within for acceptance of foreign investment. In the meantime, we can enjoy watching the latest round of TCI (The Children’s Investment Fund [UK]) vs. J-Power (JP: 9513).

Markets: The Nikkei starts the week against a shortened U.S. trading week for the Memorial Day holiday. Making matters worse is last Friday’s bout of selling that did in U.S. stocks for the week. Japanese ADRs and ETFs mostly traded lower and June Nikkei futures in Chicago shed 155 points to 13,885, compared to a 14,050 close earlier in Osaka. Thus, Japanese stocks are poised to gap down on Monday and will likely lose the 14,000 level again until late in the week.

The weekly outlook for Japanese stocks is as ambivalent as ever. The closely watched 25 DMA of Topix-1 advancers/decliners indicates extremely overbought levels with a 126.5 reading on Friday — yet although decliners outpaced advancers on Friday, in an up-market, 102 new highs were recorded compared to just 4 new lows. While foreign buying subdued (but came nowhere near falling off a cliff), there are rising expectations that higher inflation readings will bring renewed overseas buying on the latter’s hope of more bullishness from retail investors looking for higher returns on capital.

In short, it seems the first-half of the week may be in the red, while there will likely be a rally late, similar to what we have seen often over the past several weeks. The spoilers could be banks (fear of skeletons in the books) and auto (dire straits against record commodities and restrained consumers) stocks, but maybe not, with their rather attractive yields (especially for the autos) and on a report of new domestic trust (fund) launches including a $6.5-plus billion one by Nomura (JP: 8604) (NMR: 16.67 -2.00%).

Weekly recap: The Nikkei 225 gave up 1.5% to 14,012.20 last week, after a solid +4.1% performance the week prior. The intra-week high was 14,343.19 on Monday and the low was 13,658.02 on Thursday. In recent trading there’s been some clear resistance approaching 14,400 and firm support around 14,000. TOPIX 1st Section fared slightly better, but still in the red last week, ending at 1,376.69. The 1,400-level proved elusive yet again, as TOPIX traded 1,400+ intra-day Monday and Tuesday but has not closed 1,400+ since January 10th.

As of Friday’s close the N225 is trading at 16.3x trailing and 16.6x forward earnings, 1.64x book, 1.47% trailing yield and 1.55% forward yield. By comparison, the broader TOPIX (1st Section) is trading at 17.5x trailing and 16.9x forward earnings, 1.52x book and 1.67% trailing yield and 1.73% forward yield.