'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

THE J 'NIFTY-FIFTY' - In our insight posted on July 1st <a href="https://www.smartkarma.com/insights/japan-most-overbought-most-oversold-the-relative-price-score" target="_blank" data-smartkarma-citation="insights:21149">Japan: Most Overbought &amp; Most Oversold - The Relative Price Score</a>, we highlighted the emergence of a momentum-driven concentration in a small number of over-priced growth stocks which we dubbed "Japan's Nifty-Fifty". At that time, this group of stocks - many of which are widely held in foreign investor portfolios - had produced a one-year performance of 60%, substantially outperforming all benchmarks. As we then observed,    
<blockquote>
For portfolio managers willing to go along for this ride, the result has been a career-defining period of relative glory while value-orientated peers have suffered another year in the performance 'doghouse’. The last chapter of this tale requires no spoiler alert. Currently, twenty-eight of our fifty have negative of flat earnings momentum and eighteen have seen a decline in Relative Price Score in the last month. We look for further downside ahead in earnings and price momentum.
</blockquote>
LAST CHAPTER? - Whether or not we have reached the final chapter of this particular tale, recent months have not been kind to this 'strategy'. The simple average has declined by 20% over both one and three months compared to declines in the market composite of 12% and 10%, respectively. Over one year, the outperformance has declined from 54% to 18%. Certainly, momentum growth stocks have always been a feature of the Japanese market, and many could now well bounce hard with any market recovery. However, when earnings momentum turns down or negative, as it has done recently for <a href="https://www.smartkarma.com/entities/18379" target="_blank" data-smartkarma-citation="entities:18379:1">ZOZO Inc (3092 JP)</a>, <a href="https://www.smartkarma.com/entities/15441" target="_blank" data-smartkarma-citation="entities:15441:1">Monotaro (3064 JP)</a> and <a href="https://www.smartkarma.com/entities/15017" target="_blank" data-smartkarma-citation="entities:15017:1">Misumi (9962 JP)</a>, the lack of valuation support can result in short, sharp price shocks that can nullify months of relative out-performance in a few trading sessions.
TOO MUCH OF A GOOD THING - As with the US 'FAANGs, in the end, all things must pass. The chart below shows the one-year progression of the 50 companies measured by Relative Price Score which plots the relative performance of all companies on the same scale. The 4.0 'Overbought' line is the first percentile of observations for all currently-listed companies since 1990.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/256/original/2018-10-30_20-59-41.png?1540900797" class="editor-image img-responsive" data-smartkarma-image-id="68256"></figure>
<div class="content-caption">Source: Japan Analytics</div>
THE JULY 2018 'NIFTY-FIFTY' - The July 2018 'portfolio' in the table below has data as of that date. The average one-year performance was +60%, the average Price Score was 4.09 - just above the 'Overbought' line - while the average PER was 60x and PBR 8.43. The average Results Score was 8 out of a maximum of 30 and the average change from the previous quarter was -1. Only three companies, <a href="https://www.smartkarma.com/entities/1273" target="_blank" data-smartkarma-citation="entities:1273:1">OBIC (4684 JP)</a>, <a href="https://www.smartkarma.com/entities/985" target="_blank" data-smartkarma-citation="entities:985:1">Mcdonald's Japan (2702 JP)</a> and <a href="https://www.smartkarma.com/entities/7431" target="_blank" data-smartkarma-citation="entities:7431:1">Outsourcing (2427 JP)</a>, were not 'Fully Priced'.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/315/original/2018-10-31_10-06-20.png?1540948009" class="editor-image img-responsive" data-smartkarma-image-id="68315"></figure>
<div style="text-align: left;" class="content-caption">The J Nifty Fifty - July 2018 companies are presented in descending order of Market Capitalisation. The selection criteria were: market capitalisation higher than ¥183b, Relative Price Score of over 2.5, PE ratio of over 30 and PBR of over 3. "FP" means Fully Priced - a company that ranked in both the top 20% in terms of PER and PBR.  Price Score and Results Score are as defined in earlier insights.</div>
In the next section, we provide an updated performance review of the July selection, as well as updating the Nifty-Fifty to reflect current data.

THE J 'NIFTY-FIFTY' - In our insight posted on July 1st Japan: Most Overbought &amp; Most Oversold - The Relative Price Score, we highlighted the emergence of a momentum-driven concentration in a small number of over-priced growth stocks which we dubbed "Japan's Nifty-Fifty". At that time, this group of stocks - many of which are widely held in foreign investor portfolios - had produced a one-year performance of 60%, substantially outperforming all benchmarks. As we then observed,    

For portfolio managers willing to go along for this ride, the result has been a career-defining period of relative glory while value-orientated peers have suffered another year in the performance 'doghouse’. The last chapter of this tale requires no spoiler alert. Currently, twenty-eight of our fifty have negative of flat earnings momentum and eighteen have seen a decline in Relative Price Score in the last month. We look for further downside ahead in earnings and price momentum.

LAST CHAPTER? - Whether or not we have reached the final chapter of this particular tale, recent months have not been kind to this 'strategy'. The simple average has declined by 20% over both one and three months compared to declines in the market composite of 12% and 10%, respectively. Over one year, the outperformance has declined from 54% to 18%. Certainly, momentum growth stocks have always been a feature of the Japanese market, and many could now well bounce hard with any market recovery. However, when earnings momentum turns down or negative, as it has done recently for ZOZO Inc (3092 JP), Monotaro (3064 JP) and Misumi (9962 JP), the lack of valuation support can result in short, sharp price shocks that can nullify months of relative out-performance in a few trading sessions.
TOO MUCH OF A GOOD THING - As with the US 'FAANGs, in the end, all things must pass. The chart below shows the one-year progression of the 50 companies measured by Relative Price Score which plots the relative performance of all companies on the same scale. The 4.0 'Overbought' line is the first percentile of observations for all currently-listed companies since 1990.

Source: Japan Analytics
THE JULY 2018 'NIFTY-FIFTY' - The July 2018 'portfolio' in the table below has data as of that date. The average one-year performance was +60%, the average Price Score was 4.09 - just above the 'Overbought' line - while the average PER was 60x and PBR 8.43. The average Results Score was 8 out of a maximum of 30 and the average change from the previous quarter was -1. Only three companies, OBIC (4684 JP), Mcdonald's Japan (2702 JP) and Outsourcing (2427 JP), were not 'Fully Priced'.

The J Nifty Fifty - July 2018 companies are presented in descending order of Market Capitalisation. The selection criteria were: market capitalisation higher than ¥183b, Relative Price Score of over 2.5, PE ratio of over 30 and PBR of over 3. "FP" means Fully Priced - a company that ranked in both the top 20% in terms of PER and PBR.  Price Score and Results Score are as defined in earlier insights.
In the next section, we provide an updated performance review of the July selection, as well as updating the Nifty-Fifty to reflect current data.

Japan: The Demise of The "J Nifty-Fifty"?

SHORT-LIVED - The much-lauded 'breakout' in the <a href="https://www.smartkarma.com/entities/22909" target="_blank" data-smartkarma-citation="entities:22909:1">Nikkei 225 (NKY INDEX)</a> at the end of last month proved to be short-lived. As measured by Total Market Value in Yen (TMV), the market peaked at ¥726.7t on 25th September, revisited that level in 2nd October and promptly fell by 8% in eight days. Despite a modest recovery towards the end of last week, TMV is now 6.5% lower year-to-date and down 1.3% over one year.  Although the TMV has, so far, held above ¥665t - the lower bound of the nine-month trading range - in US$ terms, last week saw a break below US$6t to a new one-year low. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/245/original/2018-10-21_10-24-24.png?1540085075" class="editor-image img-responsive" data-smartkarma-image-id="67245"></figure><div class="content-caption">Source: Japan Analytics</div>SPIKED - As highlighted in our last update <a href="https://www.smartkarma.com/insights/japan-fortnightly-update-celebration" target="_blank" data-smartkarma-citation="insights:24383">Celebration</a>, both the 5-Day Relative Strength Index and 25-Day Toraku were signalling caution, which proved to be correct. Having peaked at its highest level in a year, on Monday, the former registered its second-lowest reading in over three years, while the latter has reverted to a neutral reading. In addition, the 52-week New High minus New Low indicator saw its third-lowest reading in three years. While these indicators suggest a possible short-term rebound ahead, they have yet to show the degree of capitulation indicative of a change in market trend which continues to be range-bound. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/246/original/2018-10-21_10-51-59.png?1540086749" class="editor-image img-responsive" data-smartkarma-image-id="67246"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/249/original/2018-10-21_10-52-14.png?1540087713" class="editor-image img-responsive" data-smartkarma-image-id="67249"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/250/original/2018-10-21_11-07-45.png?1540087729" class="editor-image img-responsive" data-smartkarma-image-id="67250"></figure><div class="content-caption">Source: Japan Analytics</div>CHEAPER YET - The 333 earnings revisions and 437 results announcements since 24th September have had almost no impact on aggregate TTM and Forecast Net and Operating Income - the exception being a 0.15% decline in Forecast Operating Income. TTM Net Income remains 4% higher than Forecast Net Income and offers scope for some upward revisions as half-year results for March year-end companies are announced over the next four weeks. The current TTM PER is at a three-year low of 14 times and also offers a degree of support. However, should the first-half results confirm the caution inherent in current forecasts, further market weakness is likely.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/253/original/2018-10-21_11-46-25.png?1540090011" class="editor-image img-responsive" data-smartkarma-image-id="67253"></figure><div class="content-caption">Source: Japan Analytics</div>WEAKER ¥ TO CURTAIL NEGATIVE EARNINGS MOMENTUM - The Japan Analytics' Results and Revision Scores measure the cap-weighted momentum of earnings results and forecasts/revisions for all listed companies. Both scores have been in decline since peaking in January 2018 and October 2017, respectively. Historically, one of the principal drivers of earnings has been the change in the US$/¥ exchange rate lagged six months. The recent peak in the Yen coincided with the March fiscal year-end and explains the cautious initial forecasts for the current year. The ¥10 downwards swing in the last six months boosted Q1 results and will do so again for the first half results. A recovery in earnings momentum would be a positive surprise an would provide some upside to the market.   <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/259/original/2018-10-21_13-22-32.png?1540095762" class="editor-image img-responsive" data-smartkarma-image-id="67259"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/067/260/original/2018-10-21_13-23-52.png?1540095850" class="editor-image img-responsive" data-smartkarma-image-id="67260"></figure><div class="content-caption">Source: Japan Analytics</div><div class="content-highlight">OUTLOOK - The 'dip' we expected after the September breakout was more severe than anticipated due to the confluence of some external factors. Local macroeconomic indicators are still far from positive. Industrial production is flatlining, and current trends in the German auto sector does not bode well for Japanese auto manufacturing. Higher wage incomes have been matched by food and energy price inflation and consumers have so far preferred to save rather than spend ahead of next year's 2% rise in the consumption tax. As usual, the results and revisions announced over the next four weeks will be the primary driver of stock returns and, with the market neither overbought nor overvalued, there is scope for some upside. Nevertheless, given the continuing macro concerns, the best-expected outcome is that the market stays within its nine-month trading range.  </div>

SHORT-LIVED - The much-lauded 'breakout' in the Nikkei 225 (NKY INDEX) at the end of last month proved to be short-lived. As measured by Total Market Value in Yen (TMV), the market peaked at ¥726.7t on 25th September, revisited that level in 2nd October and promptly fell by 8% in eight days. Despite a modest recovery towards the end of last week, TMV is now 6.5% lower year-to-date and down 1.3% over one year.  Although the TMV has, so far, held above ¥665t - the lower bound of the nine-month trading range - in US$ terms, last week saw a break below US$6t to a new one-year low. Source: Japan AnalyticsSPIKED - As highlighted in our last update Celebration, both the 5-Day Relative Strength Index and 25-Day Toraku were signalling caution, which proved to be correct. Having peaked at its highest level in a year, on Monday, the former registered its second-lowest reading in over three years, while the latter has reverted to a neutral reading. In addition, the 52-week New High minus New Low indicator saw its third-lowest reading in three years. While these indicators suggest a possible short-term rebound ahead, they have yet to show the degree of capitulation indicative of a change in market trend which continues to be range-bound. Source: Japan AnalyticsCHEAPER YET - The 333 earnings revisions and 437 results announcements since 24th September have had almost no impact on aggregate TTM and Forecast Net and Operating Income - the exception being a 0.15% decline in Forecast Operating Income. TTM Net Income remains 4% higher than Forecast Net Income and offers scope for some upward revisions as half-year results for March year-end companies are announced over the next four weeks. The current TTM PER is at a three-year low of 14 times and also offers a degree of support. However, should the first-half results confirm the caution inherent in current forecasts, further market weakness is likely.Source: Japan AnalyticsWEAKER ¥ TO CURTAIL NEGATIVE EARNINGS MOMENTUM - The Japan Analytics' Results and Revision Scores measure the cap-weighted momentum of earnings results and forecasts/revisions for all listed companies. Both scores have been in decline since peaking in January 2018 and October 2017, respectively. Historically, one of the principal drivers of earnings has been the change in the US$/¥ exchange rate lagged six months. The recent peak in the Yen coincided with the March fiscal year-end and explains the cautious initial forecasts for the current year. The ¥10 downwards swing in the last six months boosted Q1 results and will do so again for the first half results. A recovery in earnings momentum would be a positive surprise an would provide some upside to the market.   Source: Japan AnalyticsOUTLOOK - The 'dip' we expected after the September breakout was more severe than anticipated due to the confluence of some external factors. Local macroeconomic indicators are still far from positive. Industrial production is flatlining, and current trends in the German auto sector does not bode well for Japanese auto manufacturing. Higher wage incomes have been matched by food and energy price inflation and consumers have so far preferred to save rather than spend ahead of next year's 2% rise in the consumption tax. As usual, the results and revisions announced over the next four weeks will be the primary driver of stock returns and, with the market neither overbought nor overvalued, there is scope for some upside. Nevertheless, given the continuing macro concerns, the best-expected outcome is that the market stays within its nine-month trading range.  

Thematic (Sector/Industry)

APATHY STRIKES AGAIN<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/686/original/2018-09-23_17-11-57.png?1537690346" class="editor-image img-responsive" data-smartkarma-image-id="64686"></figure><div class="content-caption">Source: Japan Analytics</div>THE APATHY INDICATOR - Our Fortnightly Update for 26th August highlighted the lack of market activity after the end of the results announcements over the previous six weeks. In recent years, similar periods of apathy had coincided with market turning points, usually to the upside. After an initial rally the following week, our 'apathy indicator' added another three signals before the market subsequently bottomed out on 7th September. Since then, Total Market Value has risen by 6.7%, TOPIX has had its best week in almost two years, both the 50 and 200-day moving averages were surpassed and, on Friday, the Value Traded Ratio had its fifth-best day of the year. Its 'party-time' here indeed.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/690/original/2018-09-23_17-44-03.png?1537692262" class="editor-image img-responsive" data-smartkarma-image-id="64690"></figure><div class="content-caption">Source: Japan Analytics</div>BREAKOUT - Much fanfare was also made over the fact that the <a href="https://www.smartkarma.com/entities/22909" target="_blank" data-smartkarma-citation="entities:22909:1">Nikkei 225 (NKY INDEX)</a> reached a 26-year high and broke out of nine-month and 22-year trading ranges. Although such positive news is always welcome for us Japan-only 'diehards', both TOPIX and TOPIX-US$ reached new 26-year highs in January, only to later fade away for the next seven months. New highs for both these indices are required to confirm that the December 1989 high is indeed again the target.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/701/original/2018-09-05_19-59-32.png?1537698981" class="editor-image img-responsive" data-smartkarma-image-id="64701"></figure><div class="content-caption">Source: Japan Analytics</div>GAIJIN WRONGFOOTED - As <a href="https://www.smartkarma.com/profiles/25" target="_blank" data-smartkarma-citation="accounts:25">Travis Lundy</a> noted on 2nd September - <a href="https://www.smartkarma.com/insights/japan-flow-redux-foreign-investor-flows-still-matter-and-they-are-still-cyclical" target="_blank" data-smartkarma-citation="insights:23654">Foreign Investor Flows (Still) Matter, and They Are (Still) Cyclical</a>, foreign investor flows have recently been at 'the lower end of the cycle' and foreign investors tend to be pro-cyclical price-takers chasing returns on a net exposure basis driven by the relative performance of the US$TOPIX/S&amp;P 500 ratio. As we also noted in <a href="https://www.smartkarma.com/insights/japan-seasonality-sell-in-july-and-say-goodbye-please-come-back-on-culture-day" target="_blank" data-smartkarma-citation="insights:23682">Japan: Seasonality</a>, historically September is the second-worst performing month in the Japanese market calendar with October being the fourth-worst. Add some concerns over trade and auto tariffs to the mix and a portfolio underweighting of Japan at the start of this quarter was not going to alarm any trustees. Given all of the above and with a holiday this Monday, some sharp short-covering was also in evidence towards to end of last week in anticipation of more leisurely-timed long-only fund flows to come.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/704/original/2018-09-23_20-08-06.png?1537700901" class="editor-image img-responsive" data-smartkarma-image-id="64704"></figure><div class="content-caption">Source: Japan Analytics</div>CHEAP + UPSIDE TO FORECASTS - The last two weeks have taken the total market cap (ex REITs) to back above ¥700t, however, the trailing-twelve-month (TTM) PER is still below 15x. In aggregate the current forecasts for current year's Net Income are nearly ¥2t behind the TTM data, leaving scope for some market-boosting upward revisions in November as the (mostly interim) results are announced. Assuming upward revisions bring forecasts in line with our estimate the November TTM aggregate Net Income of ¥50t, the market PE at the January peak capitalisation would still be below 15x.  CAVEATS - Curbing the enthusiasm in the last paragraph are some macro caveats. Industrial production has slowed to nearly zero in recent months, and higher wage income is being mostly channelled into increased savings. For the first time in the post-WWII era, both profit's share and labour's share of GDP exceed 12%. Both cannot continue to rise in tandem indefinitely, and we would expect the former to turn down before the latter. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/705/original/2018-09-23_20-19-16.png?1537701582" class="editor-image img-responsive" data-smartkarma-image-id="64705"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/707/original/2018-09-23_20-34-21.png?1537702506" class="editor-image img-responsive" data-smartkarma-image-id="64707"></figure><div class="content-caption">Source: Japan Analytics</div>OUTLOOK - After a hectic four-day week and another shortened week to come, a pause would be welcome. The 5-day Relative Strength Index at 91 is at its highest level since 8th November 2017 and is in the first percentile of occurrences over the last three years. The 25-day Toraku advance-decline indicator is also nearing '120'. Although this is far from perfect as an indicator, recent peaks and troughs have coincided with Toraku outliers. Two weeks ago, we suggested the market would rise and Yen would fall 'into the month end absent any adverse developments on the trade front'. With newly-re-elected PM Abe in New York this week, we expect another quiet week for the continuing (now sector-specific) Japan-US trade negotiations. Further Yen weakness would limit any short-term profit-taking, and there are still enough global portfolios underweight Japan to buy the coming dip and support rolling our forecast forward until month-end.SECTOR RECOMMENDATIONS - Our sector recommendations have fared less well over the last two weeks. Our most-preferred marginally out-performed our least-preferred with the gains in Energy and Telecoms offsetting 'losses' from underweights in Utilities, Machinery, Real Estate and Autos and overweights in Information Technology and Other Commercial Products. COMPANIES - Our results, revisions and stock performance reviews below contain short comments on <a href="https://www.smartkarma.com/entities/11720" target="_blank" data-smartkarma-citation="entities:11720:1">Kikkoman (2801 JP)</a>, <a href="https://www.smartkarma.com/entities/4102" target="_blank" data-smartkarma-citation="entities:4102:1">Nissan Chemical (4021 JP)</a> and <a href="https://www.smartkarma.com/entities/1496" target="_blank" data-smartkarma-citation="entities:1496:1">Showa Denko (4004 JP)</a>.

APATHY STRIKES AGAINSource: Japan AnalyticsTHE APATHY INDICATOR - Our Fortnightly Update for 26th August highlighted the lack of market activity after the end of the results announcements over the previous six weeks. In recent years, similar periods of apathy had coincided with market turning points, usually to the upside. After an initial rally the following week, our 'apathy indicator' added another three signals before the market subsequently bottomed out on 7th September. Since then, Total Market Value has risen by 6.7%, TOPIX has had its best week in almost two years, both the 50 and 200-day moving averages were surpassed and, on Friday, the Value Traded Ratio had its fifth-best day of the year. Its 'party-time' here indeed.Source: Japan AnalyticsBREAKOUT - Much fanfare was also made over the fact that the Nikkei 225 (NKY INDEX) reached a 26-year high and broke out of nine-month and 22-year trading ranges. Although such positive news is always welcome for us Japan-only 'diehards', both TOPIX and TOPIX-US$ reached new 26-year highs in January, only to later fade away for the next seven months. New highs for both these indices are required to confirm that the December 1989 high is indeed again the target.Source: Japan AnalyticsGAIJIN WRONGFOOTED - As Travis Lundy noted on 2nd September - Foreign Investor Flows (Still) Matter, and They Are (Still) Cyclical, foreign investor flows have recently been at 'the lower end of the cycle' and foreign investors tend to be pro-cyclical price-takers chasing returns on a net exposure basis driven by the relative performance of the US$TOPIX/S&amp;P 500 ratio. As we also noted in Japan: Seasonality, historically September is the second-worst performing month in the Japanese market calendar with October being the fourth-worst. Add some concerns over trade and auto tariffs to the mix and a portfolio underweighting of Japan at the start of this quarter was not going to alarm any trustees. Given all of the above and with a holiday this Monday, some sharp short-covering was also in evidence towards to end of last week in anticipation of more leisurely-timed long-only fund flows to come.Source: Japan AnalyticsCHEAP + UPSIDE TO FORECASTS - The last two weeks have taken the total market cap (ex REITs) to back above ¥700t, however, the trailing-twelve-month (TTM) PER is still below 15x. In aggregate the current forecasts for current year's Net Income are nearly ¥2t behind the TTM data, leaving scope for some market-boosting upward revisions in November as the (mostly interim) results are announced. Assuming upward revisions bring forecasts in line with our estimate the November TTM aggregate Net Income of ¥50t, the market PE at the January peak capitalisation would still be below 15x.  CAVEATS - Curbing the enthusiasm in the last paragraph are some macro caveats. Industrial production has slowed to nearly zero in recent months, and higher wage income is being mostly channelled into increased savings. For the first time in the post-WWII era, both profit's share and labour's share of GDP exceed 12%. Both cannot continue to rise in tandem indefinitely, and we would expect the former to turn down before the latter. Source: Japan AnalyticsOUTLOOK - After a hectic four-day week and another shortened week to come, a pause would be welcome. The 5-day Relative Strength Index at 91 is at its highest level since 8th November 2017 and is in the first percentile of occurrences over the last three years. The 25-day Toraku advance-decline indicator is also nearing '120'. Although this is far from perfect as an indicator, recent peaks and troughs have coincided with Toraku outliers. Two weeks ago, we suggested the market would rise and Yen would fall 'into the month end absent any adverse developments on the trade front'. With newly-re-elected PM Abe in New York this week, we expect another quiet week for the continuing (now sector-specific) Japan-US trade negotiations. Further Yen weakness would limit any short-term profit-taking, and there are still enough global portfolios underweight Japan to buy the coming dip and support rolling our forecast forward until month-end.SECTOR RECOMMENDATIONS - Our sector recommendations have fared less well over the last two weeks. Our most-preferred marginally out-performed our least-preferred with the gains in Energy and Telecoms offsetting 'losses' from underweights in Utilities, Machinery, Real Estate and Autos and overweights in Information Technology and Other Commercial Products. COMPANIES - Our results, revisions and stock performance reviews below contain short comments on Kikkoman (2801 JP), Nissan Chemical (4021 JP) and Showa Denko (4004 JP).

RELATIVE PRICE SCORE - The Relative Price Score (RPS) measures stock price performance relative to TOPIX and is calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are, as a result, on a comparable scale, 'overbought' and 'oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. This insight updates our list of overbought and oversold companies reviews the best and worst performing companies by RPS over the last month and makes some specific long and short stock recommendations.COMPANY RPS STATISTICS - The Company 'outlier' thresholds are set to "+4" for overbought and "-2" for oversold. We have excluded the first twelve months of trading for newly-listed companies to remove the distortion created by the initial over-pricing of most public offerings in Japan of which <a href="https://www.smartkarma.com/entities/27149" target="_blank" data-smartkarma-citation="entities:27149:1">Mercari (4385 JP)</a> is the latest example. Currently, 123 companies are 'overbought', and 116 are 'oversold' - 3.3% and 3.2% of the 3,672 listed companies for which monthly data is available.  The current numbers and percentages are the largest in many years. Overbought and oversold states account for 0.7% and 1.2%, respectively of the 837,586 months of data covered since October 1990. The average 'overbought persistence' is four months with <a href="https://www.smartkarma.com/entities/16576" target="_blank" data-smartkarma-citation="entities:16576:1">Lion (4912 JP)</a> holding the record for the longest period at 24 months from September 2016 to date. The average 'oversold persistence' is 7.5 months with <a href="https://www.smartkarma.com/entities/9013" target="_blank" data-smartkarma-citation="entities:9013:1">Nippon Sheet Glass (5202 JP)</a> holding the record having been in that state for the 45 months since January 2015. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/063/937/original/2018-09-15_16-41-44.png?1536997320" class="editor-image img-responsive" data-smartkarma-image-id="63937"></figure><div class="content-caption">Source: Japan Analytics</div>OUTLIER EXTREMES - Currently, the percentage of companies that are positive outliers (&gt;4) it is a 26-year high, while the percentage of negative outliers (&lt;-2) is at a 17-year high. In the past and unsurprisingly, increases in the ratio of positive and negative outliers have been bullish and bearish, respectively. It is highly unusual for both positive and negative outliers to be rising sharply at the same time. The only similar period in the last thirty years was during the 'tech bubble'. In February 2000 the overbought and oversold percentages peaked at 2.4% and 20.5%, respectively. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/123/original/2018-09-18_11-05-49.png?1537236390" class="editor-image img-responsive" data-smartkarma-image-id="64123"></figure><div class="content-caption">Source: Japan Analytics</div>MARKET TIMING TEMPTATION - It is always appealing to attempt to derive trading strategies from such data - a temptation we shall resist except for the observations that the oversold ratio rises into market peaks but that a decline in the overbought ratio of at least one percentage point is required to confirm a peak. At present, only the former condition is fulfilled.  COMPANY RECOMMENDATIONS - Recommendations and comments are provided below on <a href="https://www.smartkarma.com/entities/5718" target="_blank" data-smartkarma-citation="entities:5718:1">Shiseido (4911 JP)</a>, <a href="https://www.smartkarma.com/entities/4126" target="_blank" data-smartkarma-citation="entities:4126:1">Lasertec (6920 JP)</a>, <a href="https://www.smartkarma.com/entities/10020" target="_blank" data-smartkarma-citation="entities:10020:1">Sakai Moving Service (9039 JP)</a>, <a href="https://www.smartkarma.com/entities/8029" target="_blank" data-smartkarma-citation="entities:8029:1">Milbon (4919 JP)</a> and <a href="https://www.smartkarma.com/entities/8467" target="_blank" data-smartkarma-citation="entities:8467:1">Workman (7564 JP)</a> as well as new entrants and potential additions to the long and short Relative Price Score Portfolios.

RELATIVE PRICE SCORE - The Relative Price Score (RPS) measures stock price performance relative to TOPIX and is calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are, as a result, on a comparable scale, 'overbought' and 'oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. This insight updates our list of overbought and oversold companies reviews the best and worst performing companies by RPS over the last month and makes some specific long and short stock recommendations.COMPANY RPS STATISTICS - The Company 'outlier' thresholds are set to "+4" for overbought and "-2" for oversold. We have excluded the first twelve months of trading for newly-listed companies to remove the distortion created by the initial over-pricing of most public offerings in Japan of which Mercari (4385 JP) is the latest example. Currently, 123 companies are 'overbought', and 116 are 'oversold' - 3.3% and 3.2% of the 3,672 listed companies for which monthly data is available.  The current numbers and percentages are the largest in many years. Overbought and oversold states account for 0.7% and 1.2%, respectively of the 837,586 months of data covered since October 1990. The average 'overbought persistence' is four months with Lion (4912 JP) holding the record for the longest period at 24 months from September 2016 to date. The average 'oversold persistence' is 7.5 months with Nippon Sheet Glass (5202 JP) holding the record having been in that state for the 45 months since January 2015. Source: Japan AnalyticsOUTLIER EXTREMES - Currently, the percentage of companies that are positive outliers (&gt;4) it is a 26-year high, while the percentage of negative outliers (&lt;-2) is at a 17-year high. In the past and unsurprisingly, increases in the ratio of positive and negative outliers have been bullish and bearish, respectively. It is highly unusual for both positive and negative outliers to be rising sharply at the same time. The only similar period in the last thirty years was during the 'tech bubble'. In February 2000 the overbought and oversold percentages peaked at 2.4% and 20.5%, respectively. Source: Japan AnalyticsMARKET TIMING TEMPTATION - It is always appealing to attempt to derive trading strategies from such data - a temptation we shall resist except for the observations that the oversold ratio rises into market peaks but that a decline in the overbought ratio of at least one percentage point is required to confirm a peak. At present, only the former condition is fulfilled.  COMPANY RECOMMENDATIONS - Recommendations and comments are provided below on Shiseido (4911 JP), Lasertec (6920 JP), Sakai Moving Service (9039 JP), Milbon (4919 JP) and Workman (7564 JP) as well as new entrants and potential additions to the long and short Relative Price Score Portfolios.

Japan: Most Overbought and Oversold - Relative Price Score Update - Companies

TURNING POINT - Despite the last four trading days being 'up', the Japanese equity market composite fell by 0.6% over the last two weeks. New 52-week lows outnumbered new highs by 6.7:1 and new lows have exceeded new highs for the last sixteen days. This post-results 'malaise' is most noticeable in the lack of market activity.  Four of the last six trading days have seen the Value Traded/Total Market Value ratio fall below 30 basis points.  Other than at the turn of the year, such levels of trading 'apathy' (marked▲on the chart below) usually coincide with changes in market direction which, in current circumstances would suggest some upside from current levels.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/735/original/2018-08-25_21-33-47.png?1535271873" class="editor-image img-responsive" data-smartkarma-image-id="61735"></figure><div class="content-caption">Source: Japan Analytics</div>SECTOR TRENDS - Only seven sectors rose by more than 1% in the last two weeks, led by Commercial Services, Multi-Industry, Media and Information Technology and only eight are up over three months. Overall the market composite has fallen by 2.9% since the end of May.  Twelve sectors have decreased by more than 1% since 10th August with Metals, Telecommunications, Autos and Consumer Services all down by more than 2%. Over both periods, and in all regards, the Energy sector is the outlier and remains attractively priced at below book value and on 8x TTM Net Income. RESULTS &amp; REVISIONS - Only 213 results and revision announcements occurred in the last two weeks, with <a href="https://www.smartkarma.com/entities/109" target="_blank" data-smartkarma-citation="entities:109:1">Idemitsu Kosan (5019 JP)</a>, <a href="https://www.smartkarma.com/entities/4909" target="_blank" data-smartkarma-citation="entities:4909:1">Hikari Tsushin (9435 JP)</a>, <a href="https://www.smartkarma.com/entities/14750" target="_blank" data-smartkarma-citation="entities:14750:1">Rizap (2928 JP)</a>, <a href="https://www.smartkarma.com/entities/24540" target="_blank" data-smartkarma-citation="entities:24540:1">SanBio (4592 JP)</a> <a href="https://www.smartkarma.com/entities/20495" target="_blank" data-smartkarma-citation="entities:20495:1">Amuse (4301 JP)</a> and <a href="https://www.smartkarma.com/entities/19550" target="_blank" data-smartkarma-citation="entities:19550:1">Open House (3288 JP)</a> being the most impactful in terms of changes in scoring.PRICE SCORE &amp; VALUATION - Banks continue to be 'Oversold' and 'Deep Value', while Commercial and Consumer Services are both 'Overbought' and 'Fully Priced'. Information Technology, a preferred sector, is now 'Fully Priced' and is close to being 'Overbought' but we would hold current positions for the time being. OUTLOOK - If the market were to see a rebound, the catalyst could be a weaker currency or a new post-re-election policy platform from PM Abe. Indeed, last week's statement by Chief Cabinet Secretary Suga that mobile phone charges need to fall by 40% suggests a more pro-active and populist third term. In any event, some mean reversion in current sector trends is likely.

TURNING POINT - Despite the last four trading days being 'up', the Japanese equity market composite fell by 0.6% over the last two weeks. New 52-week lows outnumbered new highs by 6.7:1 and new lows have exceeded new highs for the last sixteen days. This post-results 'malaise' is most noticeable in the lack of market activity.  Four of the last six trading days have seen the Value Traded/Total Market Value ratio fall below 30 basis points.  Other than at the turn of the year, such levels of trading 'apathy' (marked▲on the chart below) usually coincide with changes in market direction which, in current circumstances would suggest some upside from current levels.Source: Japan AnalyticsSECTOR TRENDS - Only seven sectors rose by more than 1% in the last two weeks, led by Commercial Services, Multi-Industry, Media and Information Technology and only eight are up over three months. Overall the market composite has fallen by 2.9% since the end of May.  Twelve sectors have decreased by more than 1% since 10th August with Metals, Telecommunications, Autos and Consumer Services all down by more than 2%. Over both periods, and in all regards, the Energy sector is the outlier and remains attractively priced at below book value and on 8x TTM Net Income. RESULTS &amp; REVISIONS - Only 213 results and revision announcements occurred in the last two weeks, with Idemitsu Kosan (5019 JP), Hikari Tsushin (9435 JP), Rizap (2928 JP), SanBio (4592 JP) Amuse (4301 JP) and Open House (3288 JP) being the most impactful in terms of changes in scoring.PRICE SCORE &amp; VALUATION - Banks continue to be 'Oversold' and 'Deep Value', while Commercial and Consumer Services are both 'Overbought' and 'Fully Priced'. Information Technology, a preferred sector, is now 'Fully Priced' and is close to being 'Overbought' but we would hold current positions for the time being. OUTLOOK - If the market were to see a rebound, the catalyst could be a weaker currency or a new post-re-election policy platform from PM Abe. Indeed, last week's statement by Chief Cabinet Secretary Suga that mobile phone charges need to fall by 40% suggests a more pro-active and populist third term. In any event, some mean reversion in current sector trends is likely. 

Japan

KIKKOMAN CORPORATION produces and markets soy sauce, alcoholic beverages, and other food products.  The Company has marketing rights for Del Monte brand products outside of the United States.  Kikkoman also operates restaurants in Japan and other countries.

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Kikkoman Corp (2801 JP)

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