Charting a Path to 45,000
We were very early to the Nikkei long and secular bull story, having first outlined the rough sketches of this call all the way back in June 2012, long before it was fashionable.
We added greater depth and confidence to this call as summer 2012 wore on, suggesting in August the Nikkei circa 2012 was potentially analogous to gold in the early 00s, and then, in mid October, directly before the Nikkei began its ascent higher, we went as far as to call Japanese equities the “Big Long” of the next decade.
We’re not pointing out previous posts to victory lap. Instead, we highlight them as reminders of the initial logic we were using in identifying the trade and why it was going to happen. We also do it as a reminder of the conclusions our initial logic pointed us to, which was that there was a strong probability the Nikkei would hit ~45K-50K in the coming few years.
As of more recent posts in 2013, we’ve begun suggesting the Nikkei, despite any short or intermediate-term head-fakes higher/lower, was slowly carving out a path to begin the next leg of its move toward that aforementioned price objective, with the consolidation from the 16K swing high witnessed in May and the immediate ~20% correction off that level and all the volatility that’s followed, the prerequisites necessary to shake out weak hands as the index charts its path higher.
As an update, per the chart below, the ratio of the DJ World Stock Index vs. Nikkei broke below important long-term support line (1) last week. That support line ran all the way back to the early 90s. This break-down likely commences the second round of Nikkei out-performance we’ve been alluding to. The next remaining downside target for the ratio is in the ~0.175 area, or ~10% lower at line (2) support, suggesting the Nikkei can out-perform other global market averages by this amount over the intermediate-term before any short-term correction reverses that trend.
Second, we want to update our “Rosetta Stone” analog comparison to copper, which remains incredibly similar.
Phase (A), or the initial “easy money” phase of the Nikkei’s run in late 2012 and early 2013, is over. We now appear to be in phase (B); while the index appears poised for more upside in this phase, it appears to be of the volatile, grind-it-out variety before it enters the final, euphoric phase (C) of the rally, another “easy money” phase. As it often goes, bull markets are the juiciest in their beginnings and ends.
The other way to think about the Nikkei’s move thus far off its March 2009 lows is to compare it to the ones the Dow took post 1901-1921 and 1966-1982 secular bears. We suggested comparing the Nikkei to these two periods in April 2012 because when we discounted the index in real terms (i.e., Nikkei / 10 Yr UST yield) from its secular high in 1989 to its secular low in 2009, the move was visually not one of unabated 75% downside as it appears in nominal terms, but one of volatile, sideways action akin to the aforementioned secular bears on the Dow.
Here’s what an updated analog looks like b/t these three moves. This one suggests slightly less bullish outcomes than the copper analog above – a Nikkei target of ~25K-30K (1966-1982 Dow) or 40K-45K (1901-1921 Dow) in 1Q17.
Lastly, this post on the Nikkei’s amazing run in spring of this year confirms statistically what I’ve suggested above by referencing the secular bulls that began in 1921 and 1982 – the Nikkei’s price action this year really only shares these two historical periods as analogies in terms of its extreme strength, making it worthwhile to compare them together.