Japanese stocks may have finally bottomed after the ratio of short bets on shares trading on the Tokyo Stock Exchange climbed to a record high. Spikes in bearish bets indicate extreme pessimism and can lead to a short squeeze if stocks rebound, driving up prices further. When the ratio reached near current levels in March, it marked the start of a 9 percent rally over the next two months for the Topix index. The gauge has since lost all those gains and is trading near a one-year low amid growing concerns over upcoming corporate earnings and a slowdown in China’s economy.
The Nikkei-225 broke below the trend mean in a dynamic manner this morning in sympathy with the wider corrective phase evident on major stock markets globally.
The big difference Japan enjoys, at least so far is that the trading action this year looks like little more than first step above the decades long range below 20000. Provided the Index can hold that level the benefit of the doubt can continue to be given the benefit of the doubt.
Importantly, while interest rate sensitive midcap and small cap indices all over the world have broken lower over the last couple of weeks, the Topix 2nd Section Index has been reasonably steady despite today’s weakness. Japan is still a long way from tightening monetary policy and that should act as a tailwind to the domestic stock market.