Another Dead Cat’s Bounce: Japan Equity Benchmarks Soar Nikkei 7.2%, Topix 8.02%!

It’s interesting to see how media selects their headlines so as to create maximum impact for viewership attraction…

Since Japan’s Topix outperformed the Nikkei today, it garnered the headline.

Last September 9 2015 when the Nikkei outperformed the Topix, the Nikkei 225 got the headline. 

The common denominator, " the biggest gain since October 2008" --as if this has any meaning at all.

So following last week’s three session 11.1% crash, bulls mounted another major rebellion to push Japanese stocks, led by the Topix and the Nikkei, to post today's titanic rally

So what spurred the rally? Well here is the Bloomberg’s account: (bold mine)

Stocks soared in Tokyo, with the Topix posting its biggest gain in more than seven years, as investors judged shares had been oversold and a report showing Japan’s economy shrank more than expected last quarter boosted the outlook for central bank stimulus.

The Topix surged 8 percent to 1,292.23 at the close in Tokyo, its best gain since October 2008, after plunging 13 percent last week. The Nikkei 225 Stock Average jumped 7.2 percent to 16,022.58 as the yen weakened for a second day. U.S. markets rebounded on Friday to halt the longest losing streak since September. Chinese mainland markets reopen Monday after a week long holiday during which global stocks fell into a bear market.

“Japan is massively oversold,” said Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia Ltd. “Everyone is scrambling to get back in. Long-only investors are coming in along with retail and hedge funds. Plus, I would say there’s a lot of short covering going on. Also, U.S. shares rallied and we have China’s market back on today.” …

A report Monday showed Japan’s economy shrank 1.4 percent in the fourth quarter on an annualized basis, more than economists’ forecast for a 0.8 percent contraction.

So who knew: shrinking GDP equals monster rally! Bad news is good news! That’s aside from short covering and severely oversold conditions.

More…

BOJ Speculation

The yen capped its biggest two-week rally since 1998 on Friday, intensifying speculation the Bank of Japan may intervene to arrest gains that threaten to undermine almost three years of monetary stimulus. Finance Minister Taro Aso said Friday the government is watching market movements and will take any action necessary. Following a regular meeting with Abe, BOJ Governor Haruhiko Kuroda said he also would watch market moves closely.

So the simplified annotation: shrinking GDP PLUS expectations of BoJ rescue EQUALS monster rally!

Whoever said that stocks have been about G-R-O-W-T-H???!!!! One won't need a CFA for this!

Last September when the Nikkei staged its 7.7% rally I showed this chart…

Those red arrows were the huge 5%+ upside moves by the Nikkei.

Apparently, the concentration of the distribution of those huge upside moves occurred during 1990-1994 bear market. From 1990-4, almost all accounts of huge gains eventually saw the Nikkei lower than when such rallies were made.

Here is the contemporary version: Another congregation or clustering of major one day ups (as well as downs).

Even with today’s colossal 7.2% upside spike, the Nikkei remains below all the recent past major rebounds: the September 9 monster 7.7% rally, the January 22nd 5.88% rebound and the two day 4.8% NIRP bounce.

This entails that if history should serve as a guide, then today’s huge 7.2% rally may just be another run of the mill ferocious dead cat’s bounce...

...that should soon sputter.