Tuesday, September 07, 2010

Another Bottom Call Based On Bearish Sentiment, Now In Japan

From the Japanese strategists at Nomura today:

Signs in QUICK survey that Japanese stocks could bottom: The QUICK monthly stock survey for September (targeting 256 equity managers at securities companies and institutional investors over 31 Aug–2 Sep 2010) was released yesterday (6 September). For the current weighting stance for Japanese stocks, the percentage of respondents selecting “raise slightly” increased m-m (to 16% from 8% in August), but the percentage also rose for “lower slightly” (to 20% from 16%) and “lower substantially” (to 3% from 0%). Meanwhile, the percentage replying “maintain current level” fell sharply, from 75% to 59%. As a result, the weighting stance index for Japanese stocks (Exhibit 1) was below the 50 (50 = maintain current weighting) for a second consecutive month, at 48.4 (August was 48.8).

This is the seventh time since 1995 the index has gone below 50. Such a reading has generally indicated that Japanese stocks are close to bottoming (Exhibit 1). As such, the index falling below 50 appears to be a proxy for a peak in market participant pessimism. We thus think the index’s two consecutive months below 50 could suggest that Japanese stocks are about to bottom out (or that the 31 August close represents a bottom). This is consistent with the TSE’s short-selling ratio (short selling as a percentage of daily trading value) exceeding 30% (another sign that market pessimism may be peaking) on 1–2 September, the first time since 13 March 2009 (the day after TOPIX’s major 2009 bottom on 12 March).

Click on chart to enlarge, courtesy of Nomura.
However, as John Hussman rightly noted, this scene of bearishness, at least in US, was not accompanied with nervousness.

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