The following (green highlights) is an excerpt from our May 1st report entitled How Recent Weakness In Japanese Stocks Should Affect The US.
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Asbury Research’s What We’re Watching Today
How Recent Weakness In Japanese Stocks Should Affect The US
Tuesday, May 1st 2012
Chart 1 plots the Japanese Nikkei 225 daily since 2011 along with its 200-day (orange, major trend proxy) and 50-day (blue, minor trend proxy) moving averages, and highlights the recent bearish minor trend change in the index.
The red highlights show that since late March the Nikkei: 1) first tested and reversed lower from overhead resistance at the 10,208 July 2011 benchmark high, then 2) broke minor underlying support at the 9768 50-day moving average, then 3) rebounded to retest and fail at 9768, which is now minor overhead resistance, then 4) set a fresh near term low to confirm the new minor downtrend.
This recent series of events clears the way for at least another 2% decline to test major underlying support at 9152 to 9051, which represents the October 31st benchmark high and the 200-day moving average.
Although the US stock market has recently rebounded from near term support levels, the positively correlated Japanese stock market has been moving in the opposite direction. This suggests that either: A) the tight and stable long term positive correlation between these two indexes has suddenly and inexplicably stopped working, or B) one of these two series is temporarily mis-priced. We believe it’s the latter.
Moreover, because the more forward looking US bond market has been pricing in upcoming economic weakness via a 44 bps collapse in the yield of the US 10-Year Treasury Note just since March 19th, while the positive correlation between these yields and the Nikkei 255 has remained tight and stable over the past month (+84% since April 1st), of these three series (the Nikkei 255, S&P 500 and US interest rates) the US stock market appears to be the one that is temporarily out of step.
Accordingly, further upcoming weakness in the Nikkei 225 will be expected to coincide with a bearish reversal in the S&P 500.
The S&P 500 actually peaked on the day of our May 1st report and, during just the past week, has already declined by 68 points or 5%.
The Japanese Nikkei 225 met our 9152 to 9051 initial downside target earlier today, trading as low as 9109 intraday.
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