'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

MARKET COMPOSITE
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/380/original/2019-01-13_13-31-55.png?1547353946" class="editor-image img-responsive" data-smartkarma-image-id="75380"></figure>
<div class="content-caption">Source: Japan Analytics</div>
NEW YEAR RALLY - From the December 25th's lows of 8% by number and 11% by value, the percentages of Japanese stocks above the weighted sum of moving averages have recovered to 14% by number and 20% by value - just on the 'buying zone' line. As we <a href="https://www.smartkarma.com/insights/japan-2018-market-review-bear-market-rally-ahead" target="_blank" data-smartkarma-citation="insights:26917">expected</a>, the Total Market Value has rallied 8.7% and looks to have some further to run, especially if the Yen reverses some of its recent strength. The Bank of Japan provided a 'helping hand' on both 4th and 10th January, the only days this year so far on which the market declined. 
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SECTORS
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/383/original/2019-01-13_15-22-47.png?1547360595" class="editor-image img-responsive" data-smartkarma-image-id="75383"></figure>
<div style="text-align: left;" class="content-caption">LEGEND: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.</div>
SECTOR BREAKDOWN - The top six sectors measured by the percentage above the weighted average of 5-240 Days remain, predictably, domestic and defensive - REITs, Information Technology, Media and Utilities continue from our previous review with Healthcare and Transportation replacing Food, Beverages and Tobacco and Internet Content &amp; Services. Equally predictable is the bottom half-dozen. Banks, Autos, Metals, Electrical Equipment, and Chemicals remain from 23rd December Moving Average Outliers <a href="https://www.smartkarma.com/insights/japan-moving-average-outliers-year-end-blues" target="_blank" data-smartkarma-citation="insights:26895">Insight</a>, with Building Materials replacing Non-Bank Finance. Over the last trading five days, however, there has been a noticeable reversal with Autos, Electrical Equipment, and Machinery all over '55' while Other Consumer Products, Restaurants, Telecommunications and Food, Beverages &amp; Tobacco are all below '40'.
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COMPANIES
COMPANY MOVING AVERAGE OUTLIERS - As with the market and sectors, our moving average outlier indicator uses a weighted sum of the share price relative to its 5-day, 20-day, 60-day, 120 day and 240-day moving averages. Extreme values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/382/original/2019-01-13_15-19-43.png?1547360415" class="editor-image img-responsive" data-smartkarma-image-id="75382"></figure>
<div class="content-caption">Source: Japan Analytics</div>
THE +/-100% CLUB - The number of extreme negative outliers reached a peak for 1,352 on December 25th and has since returned to 'normal' levels. We suggested in the previous Insight in this series that such an extreme number of extremes was a signal of a short-term bottom, which, so far, has proved to be correct.
<div class="content-highlight">
In the DETAIL section below, we highlight the current top and bottom twenty-five larger capitalisation outliers as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note. 
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MARKET COMPOSITE

Source: Japan Analytics
NEW YEAR RALLY - From the December 25th's lows of 8% by number and 11% by value, the percentages of Japanese stocks above the weighted sum of moving averages have recovered to 14% by number and 20% by value - just on the 'buying zone' line. As we expected, the Total Market Value has rallied 8.7% and looks to have some further to run, especially if the Yen reverses some of its recent strength. The Bank of Japan provided a 'helping hand' on both 4th and 10th January, the only days this year so far on which the market declined. 

SECTORS

LEGEND: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.
SECTOR BREAKDOWN - The top six sectors measured by the percentage above the weighted average of 5-240 Days remain, predictably, domestic and defensive - REITs, Information Technology, Media and Utilities continue from our previous review with Healthcare and Transportation replacing Food, Beverages and Tobacco and Internet Content &amp; Services. Equally predictable is the bottom half-dozen. Banks, Autos, Metals, Electrical Equipment, and Chemicals remain from 23rd December Moving Average Outliers Insight, with Building Materials replacing Non-Bank Finance. Over the last trading five days, however, there has been a noticeable reversal with Autos, Electrical Equipment, and Machinery all over '55' while Other Consumer Products, Restaurants, Telecommunications and Food, Beverages &amp; Tobacco are all below '40'.

COMPANIES
COMPANY MOVING AVERAGE OUTLIERS - As with the market and sectors, our moving average outlier indicator uses a weighted sum of the share price relative to its 5-day, 20-day, 60-day, 120 day and 240-day moving averages. Extreme values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. 

Source: Japan Analytics
THE +/-100% CLUB - The number of extreme negative outliers reached a peak for 1,352 on December 25th and has since returned to 'normal' levels. We suggested in the previous Insight in this series that such an extreme number of extremes was a signal of a short-term bottom, which, so far, has proved to be correct.

In the DETAIL section below, we highlight the current top and bottom twenty-five larger capitalisation outliers as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note. 


Japan: Moving Average Outliers - New Year Rally

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/363/original/2019-01-11_14-16-49.png?1547292773" class="editor-image img-responsive" data-smartkarma-image-id="75363"></figure>

Source: Japan Analytics</div>
CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including <a href="https://www.smartkarma.com/profiles/381" target="_blank" data-smartkarma-citation="accounts:381">Thomas Schroeder </a> <a href="https://www.smartkarma.com/insights/dollar-yen-big-short-phase-ii" target="_blank" data-smartkarma-citation="insights:27163">here</a> on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/287/original/2019-01-11_14-44-07.png?1547185462" class="editor-image img-responsive" data-smartkarma-image-id="75287"></figure>
<div class="content-caption">Source: Japan Analytics</div>
¥ &lt; 100 - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/313/original/2019-01-12_10-50-14.png?1547257825" class="editor-image img-responsive" data-smartkarma-image-id="75313"></figure>
<div class="content-caption">Source: Japan Analytics</div>
EARNINGS DRIVER - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/319/original/2019-01-12_13-40-19.png?1547268030" class="editor-image img-responsive" data-smartkarma-image-id="75319"></figure>
<div class="content-caption">Source: Japan Analytics</div>
CURRENCY CORRELATIONS - In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/318/original/2019-01-12_13-15-40.png?1547266553" class="editor-image img-responsive" data-smartkarma-image-id="75318"></figure>
<div class="content-caption">Source: Japan Analytics</div>
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT - We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.




Source: Japan Analytics
CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including Thomas Schroeder  here on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  

Source: Japan Analytics
¥ &lt; 100 - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. 

Source: Japan Analytics
EARNINGS DRIVER - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? 

Source: Japan Analytics
CURRENCY CORRELATIONS - In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, Toyota Motor (7203 JP).

Source: Japan Analytics
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT - We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.

Japan: What to Buy & Sell if the ¥ Rises to 90

Chart based progressive global trading strategies, Chart Partners

Thomas Schroeder

Chart based progressive global trading strategies

Chart Partners

Chart Partners objective is to discover medium-term cycle turns and profit opportunities before they unfold, within structural trends while preserving capital with clear degrees of risk. We have real return ideas. 

Markets are dynamic and trading systems must reflect this. It is crucial to determine underlying correlations and lead-lag relationships within global markets and the impact on linked instruments. Our weekly Chartonics product gives you short-term trading strategies that can be applied within the medium and longer term macro trends that are mapped out in our strategy updates. 

Our methodology fuses global market variables and isolates drivers in trends. We specialize in FX, index trade in NY and Asia with a focus on Asian stocks. 

Technical Analysis

Major top and short call at USD/JPY 114 and flash decline did have a direct impact on a risk assets and the Nikkei in line with our S&amp;P and Nikkei short calls. The second phase of USD/JPY weakness will usher in the next downturn in risk assets in late Q1 after some tactical posturing. We do view SPX 2,600 as a good level to re cycle shorts with some range work in store for February.High degree divergence is still not fully unwound and implies the USD/JPY is set for a new low and part of phase II of the pain trade. <a href="https://www.smartkarma.com/insights/japan-s-crowded-long-faces-exodus-pressure" target="_blank" data-smartkarma-citation="insights:26105">Japan's Crowded Long Faces Exodus Pressure</a> . <a href="https://www.smartkarma.com/insights/japan-bank-index-bearish-head-and-shoulders" target="_blank" data-smartkarma-citation="insights:27087">Japan Bank Index Bearish Head and Shoulders</a> .JPY crosses versus the AUD, GBP and Euro are currently nudging up against key resistance points that represent an interesting pivot point to stage a fresh decline (good risk aversion barometers).We are seeing the knock on effect in Asian FX.USD/JPY will surpass our original downside target of 108-109.

Major top and short call at USD/JPY 114 and flash decline did have a direct impact on a risk assets and the Nikkei in line with our S&amp;P and Nikkei short calls. The second phase of USD/JPY weakness will usher in the next downturn in risk assets in late Q1 after some tactical posturing. We do view SPX 2,600 as a good level to re cycle shorts with some range work in store for February.High degree divergence is still not fully unwound and implies the USD/JPY is set for a new low and part of phase II of the pain trade. Japan's Crowded Long Faces Exodus Pressure . Japan Bank Index Bearish Head and Shoulders .JPY crosses versus the AUD, GBP and Euro are currently nudging up against key resistance points that represent an interesting pivot point to stage a fresh decline (good risk aversion barometers).We are seeing the knock on effect in Asian FX.USD/JPY will surpass our original downside target of 108-109.

Japanese banks telegraphed the Nikkei plunge as did our insight on the USD/JPY <a href="https://www.smartkarma.com/insights/dollar-yen-big-short-inflection-level-and-targets" target="_blank" data-smartkarma-citation="insights:25851">Dollar Yen BIG Short/Inflection Level and Targets</a> .We flagged a bearish Nikkei cycle in <a href="https://www.smartkarma.com/insights/japan-s-crowded-long-faces-exodus-pressure" target="_blank" data-smartkarma-citation="insights:26105">Japan's Crowded Long Faces Exodus Pressure.</a>Japan bank index exhibits are very clear bearish head and shoulder pattern that broke neckline support and will offer a great short into a bounce for further weakness. This warns of further deterioration in the Nikkei post uptick.

Japanese banks telegraphed the Nikkei plunge as did our insight on the USD/JPY Dollar Yen BIG Short/Inflection Level and Targets .We flagged a bearish Nikkei cycle in Japan's Crowded Long Faces Exodus Pressure.Japan bank index exhibits are very clear bearish head and shoulder pattern that broke neckline support and will offer a great short into a bounce for further weakness. This warns of further deterioration in the Nikkei post uptick.

Japan Bank Index Bearish Head and Shoulders

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI ex-U.S., EAFE, and EM) are all trading within patterns of lower highs and lower lows, leading us to believe the most likely scenario is that this near-term bounce is likely nothing more than a countertrend rally before longer-term downtrends reassert themselves. The one bright spot is EM.  In this report we highlight a number of attractive set-ups within the Financial, Communication, Engineering &amp; Construction, and Transportation Sectors.

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI ex-U.S., EAFE, and EM) are all trading within patterns of lower highs and lower lows, leading us to believe the most likely scenario is that this near-term bounce is likely nothing more than a countertrend rally before longer-term downtrends reassert themselves. The one bright spot is EM.  In this report we highlight a number of attractive set-ups within the Financial, Communication, Engineering &amp; Construction, and Transportation Sectors.

Global Equity Strategy: Bearish with the Exception of EM.

Japan

The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The Nikkei Stock Average was first published on May 16, 1949, where the average price was ¥176.21 with a divisor of 225. 

Nikkei 225 (NKY INDEX)

Japan: Moving Average Outliers - New Year Rally

MARKET COMPOSITE NEW YEAR RALLY - From the December 25th's lows of 8% by number and 11% by value, the percentages of Japanese stocks above the...

Campbell Gunn

Japan: What to Buy & Sell if the ¥ Rises to 90

CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX...

Campbell Gunn

Dollar Yen BIG Short Phase II

Major top and short call at USD/JPY 114 and flash decline did have a direct impact on a risk assets and the Nikkei in line with our S&P and...

Thomas Schroeder

Japan Bank Index Bearish Head and Shoulders

Japanese banks telegraphed the Nikkei plunge as did our insight on the USD/JPY Dollar Yen BIG Short/Inflection Level and Targets .We flagged a...

Thomas Schroeder

Global Equity Strategy: Bearish with the Exception of EM.

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI...

Vermilion Research