Was the September Revival in Japanese Equities A Bear Trap?

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on Oct 8, 2021
Updated: Dec 19, 2022
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Japanese equity investors have seen the September rally fading recently. The market retraced almost all the advances caused by the resignation of Yoshihide Suga, as the new leadership prepares for a stimulus package to be discussed later this year.

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Japanese equities have celebrated the previous prime minister's resignation and broke higher in September after many months of consolidation. Thus, it appeared that the rally had started, and the Nikkei 225 will finally close the gap and catch up with the rally seen in the U.S. equity indices in 2021.

It was not the case.

The rally was sparked by news that the new leadership will see to boost the Japanese recovery by providing a stimulus package to be discussed later this year. Moreover, the Bank of Japan, despite ending its equity ETF bond-buying programme in Q2 2021, promised to intervene directly should the market jitters increase.

Everything Favours Higher Japanese Equities – So, Why Did the Rally Fade?

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Besides the upcoming stimulus package, other factors help build a bullish case for Japanese equities. For once, Japanese fundamentals are sound if we only look at the widening 12-month forward price-to-earnings ratio compared to European equities. Also, Japanese equities act as a diversifier, thus having a place in a diversified portfolio.

Yet, despite all that, the September rally faded. The Nikkei 225 index was not able to hold above 30,000, and the rejection suggests a possible double top formation might be in place. If that is the case, the technical target points to a further move lower to 24,000. Only a new higher high would turn the bearish momentum around.

So, why did stocks decline? As always, investing is more art than science, and finding the right side of the market is not as easy as it may seem. Even when everything points in one direction, or exactly because of that, the market may turn around on nothing at all. 

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