Focus on the euro's rapid rise — Mr. Tetsu Emori

Release date: 2020/06/05 08:33

　〔GLOBAL EQUITY & BOND MARKET〕
【Market Commentary and Analysis of U.S. Stock & Bond Markets】
Dow Jones Industrial Average: 26281.82 (+11.93) <+0.05%>
S&P 500: 3112.35 (-10.52) <-0.34%>
Nasdaq Composite: 9615.813 (-67.1) <-0.69%>
Nasdaq-100: 9629.664 (-75.02) <-0.77%>
FANG Index: 3870.54 (-62.16) <-1.58%>
Russell 2000: 26281.82 (+11.93) <+0.05%>
VIX: 25.81 (+0.15) <+0.58%>
SOX: 1953.47 (+16) <+0.83%>

U.S. stocks rose modestly as economic activity continued to reopen in the U.S. and Europe, but the S&P 500 and Nasdaq indices fell. The FANG index, a major tech-heavy group, declined sharply. The push to restart economic activity amid the coronavirus spread continued in Europe and the U.S., supporting investors' risk appetite, while the ECB unleashed additional stimulus measures but with limited upside. American Airlines Group surged 41.1% on plans to cut domestic routes from July. Delta Air Lines rose 13.7%, United Airlines 16.2%, Boeing 6.4% as airline-related stocks were bought. Bank of America rose 3.8% and Wells Fargo 4.8% with financials also higher.

U.S. initial jobless claims totaled 1.87 million, below 2 million for the first time since lockdowns began in March. However, surpassing market expectations raised concerns about the labor market. As stocks had risen sharply recently, profit-taking selling was common, with sessions trading in the negative territory. Microsoft fell 1.3%, Apple fell 0.9%, Twitter fell 3.3%, Zoom Video Communications fell 6.0%, with IT stocks leading the selling. The May payrolls report due on the 5th is expected to show unemployment rate worsening to 19.7%.

For the week ending May 30, initial jobless claims totaled 1.877 million, down 249,000 from the prior week. With COVID-19 containment measures eased and economic activity broadly reopening nationwide, claims fell below 2 million for the first time in 11 weeks since lockdown. Over the 11 weeks since the lockdown began, total claims stood at 42.647 million. Meanwhile, continuing unemployment claims through the week ending May 23 rose to 21.487 million, up 649,000.

Quarterly productivity for Q1 in the nonfarm sector declined 0.9% on an annualized basis from the prior quarter, revised up from a preliminary 2.5% decline. Year-on-year, it rose 0.7%. One inflation indicator, unit labor costs, rose 5.1% from the previous quarter and 1.9% year-on-year.

April U.S. trade statistics (balance of payments basis) showed a combined goods and services trade deficit widening 16.7% month-over-month to $494.08 billion. The deficit widened for the second consecutive month. With COVID-19-related restrictions on business activity and a global economic slowdown, external demand fell. Exports fell 20.5%, imports fell 13.7%. The declines were the largest on record since the data began. Automotive-related manufacturing, transportation, and travel services were weak. Meanwhile, April’s goods deficit with China widened 89.8% from the prior month to $22.466 billion. Among countries, China had the largest deficit. Exports to China rose 7.9%, imports from China rose 56.9%. China is reopening its economy ahead of others, and transactions surged. The goods deficit with Japan fell 24.6% from the prior month to $4.196 billion, with roughly 80% of this comprised of automotive-related goods. Exports to Japan fell 17.1%, imports fell 20.5%.

IATA on the 3rd said that with travel restrictions easing and air travel resuming around the world, airlines are lowering fares to attract more customers, which is expected to put further pressure on earnings. IATA noted that domestic passenger traffic in May recovered about 30% from April’s level when almost all flights were halted due to travel restrictions. With the resumption of operations, airlines lowered fares by an average 23% in May. Airlines are in need of cash amid the COVID-19 crisis, and by offering cheaper fares they appear to be trying to attract passengers. Unit costs per seat, affected by COVID-19 countermeasures, have already risen, and as operations resume, the period ahead is expected to be challenging for carriers.

IATA expects that many airlines will only reach profitability far in the future. Meanwhile, conditions in Asia are improving steadily, with domestic services in China, South Korea, and Vietnam recovering to about 25% of a year earlier. In the Northern Hemisphere, the usual rise in bookings from March for the summer holidays has only just begun; Google flight searches are 60% below January levels.

U.S. 2-year yield: 0.198% (−0.0021)
U.S. 10-year yield: 0.825% (+0.0641)
U.S. 30-year yield: 1.635% (+0.0843)
U.S. 2–10 year yield spread: −0.627% (−0.0660)

U.S. 10-year note futures: 138.156 (−0.41) <−0.29%>
U.S. high-yield bonds: 83.67 (−0.26) <−0.31%>

U.S. Treasuries see long-term yields rising. The ECB decided to expand emergency bond purchases, and U.S. initial jobless claims did not rise as much as expected, boosting market sentiment. The 10-year yield rose to as high as 0.822%, the highest since March 27. At the ECB meeting on the 4th, policy rates were kept unchanged, while the PEPP purchases were increased by 600 billion euros and the purchase period extended by six months to the end of June 2021.

【U.S. Stock Trading Strategy】
U.S. stocks are slightly heavy on the upside. Ahead of today’s employment data, some profit-taking may be occurring. However, given that indicators have largely ignored in the past, this seems unlikely. After rising for two and a half months from a low, a pause might be welcome. Yet the trend remains higher. As long as the uptrend continues, the key is not to short but to stay long. If prices turn down, it would be prudent to cover; if they fall further, consider going short. In such a market, many investors may misinterpret that buying will yield profits. But such investments will not be rewarded in the end. Those who fail to maintain positions through a reversal may be forced to sell at the bottom. Eventually, such declines will come.

On the other hand, the bears (short-sellers) may be feeling the strain. With prices not easily moving lower, they may wonder why prices keep rising. I would like to check whether the futures positions in the S&P 500 and Nasdaq-100 futures show a reduction in short positions. If short covering remains limited, this market may not be over yet. As the saying goes, “the trend is your friend,” and in this case that seems apt. Economic data continue to deteriorate and earnings forecasts are deteriorating, yet stocks are rising. Even if it feels odd, criticizing it could cost you profits.

From the perspective of macro investors who emphasize fundamentals, the current market is hard to justify, but fighting the market’s moves can be costly. In this environment, one should focus on capital flows rather than trying to justify price increases with macro or fundamental arguments. This can be seen as a form of fundamental consideration. Even seemingly overvalued shorts can be viewed as part of price formation and thus a fundamental factor. As long as futures and ETFs see selling pressure from shorts, the market will rise. In the stock market, this is often called supply and demand, but more precisely it is position supply and demand. Separate from the economy’s supply and demand and use the correct terminology.

Allianz Chief Economic Advisor Mohamed El-Erian questions investors who stay bullish by betting on central banks’ market support, saying, “I won’t do it.” He seems to prefer fundamentals-driven investing. In the past, Greenspan and other chairmen supported stock prices with monetary easing whenever the market looked like it might crash. The market coined the term “Greenspan Put” as a sign of respect. Since then, the policy style has been carried on by the Bernanke Put and Yellen Put. Today, the term “Powell Put” has also emerged.

Chairman Powell had at one point been expected to break this trend, but ultimately yielded to market pressure and had to continue the previous approach. As a result, the term is becoming a broader label rather than a specific “Fed Put.” Indeed, the Fed Put policies can directly influence markets, especially in the United States. But it is also true that this policy has contributed to bubbles by diverging from economic reality. Yet this is like a drug: once you’ve had a taste, it’s hard to quit. If you quit, the market could collapse, and investors would lodge complaints, potentially undermining confidence in the dollar and risking a dollar crash.

El-Erian’s stance might sound idealistic, but adopting such a stance would likely prevent profit in today’s U.S. market. It’s unfortunate, but criticizing Fed policy without critiquing market movements will only alienate you from the market and cost opportunities. Valuations are high, and the disconnect with the real economy appears large, but unless you understand what you want to do with the market and why you participate, the market will overwhelm you. The key is to be pragmatic and not tie your interpretation of market moves to your own preferences.

The short-term trading strategy remains unchanged. Major stock indices are giving long signals. The FANG Index fell, but remains a long position; however, if prices fall further, it may flip to closing out. I will judge based on today’s moves. The overall trend is upward, and staying long remains effective. We may be approaching a level to be cautious, but as long as the trend persists, we will not initiate selling to cover or go short. Until a decision to cover is warranted, the prudent stance is to stay long and ride the market to maximize profits.

As noted repeatedly, if you focus on the background or underlying details of the current market, you cannot keep up. Until the rebound ends, the market will likely continue; adopt a pragmatic view. Even if you feel it is overvalued, a rising market can keep rising. A someday correction will come, but you should react only when such signs appear. Until then, simply ride the rise. If prices start falling, do not hesitate to switch to a short position. Speed of adjustment is also necessary. Being dogmatic is not advisable.

As repeated, when the S&P 500 rises more than 20% in 50 days, the subsequent month tends to rise 4.63%, after 3 months 7.60%, and after six months 10.08%. The probabilities of further gains are 100%, 85.7%, and 100%, respectively. This implies gains are likely. A strong market maintains its strength. Conversely, looking at cases where prices fell before a rebound, among those that dropped more than 20% in 50 days, one month later prices rose 4.24%, after 3 months 7.77%, and after six months 13.71%. The probabilities were 62.5%, 71.4%, and 85.7%, respectively. In these cases too, prices did rebound, with relatively high probabilities.

Thus, when prices drop sharply and then rebound, they tend to continue higher. It would be wise to keep this historical data in mind.

Regarding long-term portfolio strategy, the approach differs from short-term trading. This is a growth-oriented strategy. Therefore, buy more on significant declines. It is important to keep funds available to buy on 30%, 35%, 40%, 45%, and 50% declines from February highs. Moreover, considering risk, if declines can be anticipated down to 55% or up to 75%, you can buy on dips even during a Lehman-like crash. Diversify across assets and over time to avoid being swept up in large drops. You must always keep cash on hand; without cash you cannot invest. Always maintain cash so you can buy on downturns. This is the key to surviving long-term investing.

For long-term investing, it is crucial to buy with real assets (such as ETFs) in the “spot.” If you hold physical assets, you can withstand declines. Do not use physical holdings as collateral for futures or CFDs, as that would double your risk and increase overall risk. Prices will likely rebound eventually. However, global growth is slowing, and stock market returns are not as high as before. Over the past 20 years, U.S. stock returns have fallen to less than half of historical norms. Growth has slowed, and interest rates are low, so this is understandable. We must accept this reality.

Basically, positions in the S&P 500 alone should suffice. Broad diversification across assets leads to stable management. Because VIX also serves as a hedge, including it in trading allows for a broader approach. The combination of the S&P 500 and VIX is extremely important.

＜U.S. Stock Market Short-Term Trading Strategy＞＜U.S. Stock Market Short-Term Trading Strategy＞
Dow Jones: LongDow Jones: Long
S&P 500: LongS&P 500: Long
Nasdaq Composite: LongNasdaq Composite: Long
Nasdaq-100: LongNasdaq-100: Long
FANG Index: LongFANG Index: Long
Russell 2000: LongRussell 2000: Long
VIX: ShortVIX: Short

【U.S. Bond Trading Strategy】【U.S. Bond Trading Strategy】
U.S. 10-year Treasury futures: Short. Bond selling indicates risk-on mood. High-yield bonds remain long. The market is currently flowing into risk assets. By watching the movement of the high-yield ETF HYG, one can gauge investors’ risk tolerance. In particular, 10-year futures have compressed in their price movement, suggesting potential for a larger move.U.S. 10-year note futures are short. Bond selling signals risk-on. High-yield bonds remain long. There is currently capital flowing into risk assets. Watching the high-yield ETF HYG can gauge investors’ risk tolerance. In particular, the 10-year futures have become more range-bound, suggesting potential for larger moves.

For long-term portfolios, it may be wise to hold U.S. Treasuries consistently, but gradually reduce. Gold and cash are expected to gain prominence. Ideal allocation could be 40% stocks, 30% gold, 30% cash.For long-term portfolios, it is advisable to hold U.S. Treasuries, but gradually reduce. Gold and cash will lead from here. A portfolio with 40% stocks, 30% gold, 30% cash is ideal.

＜Bond Market Short-Term Trading Strategy＞＜Bond Market Short-Term Trading Strategy＞
U.S. 10-year Treasury futures: ShortU.S. 10-year Treasury futures: Short
U.S. High-Yield bonds: LongU.S. High-Yield bonds: Long

【Europe & Other Stock & Bond Market Commentary & Analysis】【Europe & Other Stock & Bond Market Commentary & Analysis】

FTSE: 6341.44 (-40.97) <-0.64%>FTSE: 6341.44 (-40.97) <-0.64%>
DAX: 12430.56 (-56.8) <-0.45%>DAX: 12430.56 (-56.8) <-0.45%>
Euro Stoxx: 366.25 (-2.67) <-0.72%>Euro Stoxx: 366.25 (-2.67) <-0.72%>
Shanghai Composite: 2919.251 (-4.12) <-0.14%>Shanghai Composite: 2919.251 (-4.12) <-0.14%>
Hang Seng Index: 24366.3 (+40.68) <+0.17%>Hang Seng Index: 24366.3 (+40.68) <+0.17%>
H-shares: 9967.93 (+0.4) <±0%>H-shares: 9967.93 (+0.4) <±0%>
NIFTY: 10029.1 (-32.45) <-0.32%>NIFTY: 10029.1 (-32.45) <-0.32%>
Bovespa Index: 93828.61 (+826.47) <+0.89%>Bovespa Index: 93828.61 (+826.47) <+0.89%>
Russia stocks: 1257.31 (-44.57) <-3.42%>Russia stocks: 1257.31 (-44.57) <-3.42%>

London stocks retreated. After lockdown measures related to the coronavirus ended and expectations for a revival in economic activity, prices hit a near three-month high, but banks and resource stocks were sold and closed lower. As Britain gradually eases lockdown measures, FTSE 100 and FTSE 250, which comprises mid-caps, have risen sharply in recent weeks. The BOE signaled it would seek additional information from banks regarding loan impairments caused by the virus.London stocks retreated. After lockdown measures related to the coronavirus ended and hopes for economic revival rose, prices reached a near three-month high, but banks and resource stocks were sold and the index turned negative toward the close. As Britain's lockdown measures gradually ease, the FTSE 100 and the FTSE 250 (mid-cap index) have surged in recent weeks. The Bank of England signaled it will seek additional information from banks regarding loan impairments caused by the virus outbreak.

European stocks also slipped. Profit-taking was observed. However, with the ECB expanding stimulus to support economies hit by the virus, euro-area banks were bought. STOXX Eurozone Banks Index rose 1.12%. The ECB expanded its asset purchase program by a surprise €600 billion to €1.35 trillion and extended the purchase period to end-June 2021, six months longer than initially planned. Meanwhile, STOXX600 Automobiles & Parts, Utilities, and Healthcare indices fell.European equities also fell. Profit-taking was evident. However, with the ECB expanding stimulus to support the economy hit by the virus, euro-area banks were bought. The STOXX Europe 600 Banks index rose 1.12%. The ECB increased its asset purchase program by €600 billion to €1.35 trillion and extended the program until the end of June 2021, six months longer than initially planned. Meanwhile, the STOXX 600 Automobiles & Parts, Utilities, and Healthcare indices fell.

Germany’s coalition government agreed on a €130 billion stimulus to spur growth. However, given its emphasis on support for electric vehicles, Daimler fell 2.5% and Volkswagen fell 1.0%, while Adidas rose 1.8%. After lockdowns in Greater China ended, sales reportedly returned to positive growth faster than expected, which was viewed as a positive sign.Germany’s coalition government agreed on a €130 billion stimulus plan to support the economy. However, given the emphasis on support for electric vehicles, Daimler fell 2.5% and Volkswagen fell 1.0%, while Adidas rose 1.8%. After lockdown measures in China eased, sales recovered to positive growth faster than expected, which was seen as a positive signal.

UK 10-year yield: 0.307% (+0.034)UK 10-year yield: 0.307% (+0.034)
Germany 10-year yield: −0.324% (+0.025)Germany 10-year yield: −0.324% (+0.025)
France 10-year yield: −0.012% (−0.023)France 10-year yield: −0.012% (−0.023)
Italy 10-year yield: 1.42% (−0.132)Italy 10-year yield: 1.42% (−0.132)
Greece 10-year yield: 1.383% (−0.122)Greece 10-year yield: 1.383% (−0.122)

Euro-area bonds saw Italian yields fall. The ECB’s expanded emergency bond purchases were viewed as supportive. Italy’s 10-year yield hit its lowest since late March, marking the largest daily decline since May 18. Yields on southern European bonds also fell. Conversely, strengthening stimulus expectations supported a rise in the yield of safer German bunds. The 5-year/5-year euro area inflation swap rose above 1.07%, the highest in three months. Germany’s 20-year yield briefly turned positive at 0.017% for the first time since late January.Euro-area bonds saw Italian yields retreat. The ECB’s expanded emergency bond purchases supported sentiment. Italy’s 10-year yield hit its lowest since late March, marking the largest daily decline since May 18. Yields on Spain, Portugal, and Greece also declined. Meanwhile, improved investor sentiment supported higher yields on German Bunds, a safe asset. The 5-year/5-year inflation swap rate exceeded 1.07%, a three-month high. Germany’s 20-year yield turned briefly positive at 0.017% for the first time since late January.

At the 4th regular ECB meeting, policy rates were kept steady as expected, while the bond-buying program launched to combat the pandemic was expanded. The PEPP purchases were increased by 600 billion euros to 1.35 trillion euros, and the purchase horizon was extended by six months to end-June 2021. Reinvestments of maturing PEPP bonds will continue at least until the end of 2022.At its 4th regular meeting, the ECB kept policy rates unchanged as expected, while expanding its bond-buying program launched to combat the pandemic. The program aims to support the region’s economy which could face the largest recession since World War II. The PEPP purchases were increased by 600 billion euros to 1.35 trillion and extended by six months to end-June 2021. Reinvestments of maturing PEPP bonds will continue at least through the end of 2022.

In a statement, the Governing Council said that it stands ready to adjust all policies as needed to ensure inflation moves toward the target in a sustainable manner. The key policy rate and the deposit facility rate were kept at 0% and −0.5%, respectively.In a statement, the ECB said: “The Governing Council is prepared to adjust all instruments as necessary to ensure inflation moves toward the target in a symmetric and sustained manner.” The main policy rate was left at 0% and the deposit rate at −0.5%.

Lagardé, as base case, expects the euro area economy to contract by 8.7% this year. Containment measures to curb COVID-19 spread were in place for more than two months across much of Europe. Growth is projected at 5.2% in 2021 and 3.3% in 2022, but risks to the base scenario are skewed to the downside. Lagarde stated that the degree of economic contraction and recovery will depend on the duration and effectiveness of containment measures, the effectiveness of policies to cushion income and employment, and the permanent impact on supply capacity and domestic demand. Inflation forecasts were significantly revised down due to lockdowns and oil price declines. This year's inflation is projected at 0.3%, well below the prior 1.1% and far below the ECB’s near-2% target. For 2021, inflation was revised to 0.8% (from 1.4%), and for 2022 to 1.3% (from 1.6%).Lagarde, presenting the baseline scenario, expects the euro area economy to contract by 8.7% this year. The restrictions to curb the spread of COVID-19 were in place for more than two months across most of Europe. Later, growth of 5.2% in 2021 and 3.3% in 2022 were projected, but Lagarde noted that downside risks were skewed. She said: “The extent of economic contraction and recovery will depend on the duration and effectiveness of containment measures, the impact on income and employment, and the lasting effects on supply capacity and domestic demand.” The inflation outlook was revised sharply down due to lockdowns and a plunging oil price. This year’s inflation projection was cut to 0.3%, well below the previous 1.1% and far below the ECB’s near-2% target. For 2021, inflation was revised to 0.8% (previous 1.4%), and for 2022 to 1.3% (previous 1.6%).

April euro-area retail sales fell 11.7% month-on-month and 19.6% year-on-year, the largest decline since data started in 1999. The euro-area drop was driven by restrictions such as lockdowns and store closures due to the COVID-19 outbreak. Automobile fuel dropped 27.7%, non-food (excluding automotive fuel) fell 17.0%, and food, beverages, and tobacco fell 5.5%. By country: France −20.0%, Spain −19.4%, Germany −5.3%. Finland rose 0.3%, Sweden was flat.April euro-area retail sales fell 11.7% m/m and 19.6% y/y. The month-on-month drop was the largest since 1999, while the year-on-year decline was the worst since data collection began. The EU as a whole fell 11.1%. Restrictions such as lockdowns and shop closures due to the coronavirus clearly weighed on activity. In the euro area, auto fuel fell 27.7%, non-food (excluding auto fuel) fell 17.0%, and food, beverages, and tobacco fell 5.5%. By country: France −20.0%, Spain −19.4%, Germany −5.3%. Finland rose 0.3%, Sweden was flat.

UK’s Society of Motor Manufacturers and Traders (SMMT) reported on the 4th that May new car registrations fell by 89% year-on-year, following a 97% drop in April, marking a steep decline. The lockdown hit car dealers hard. May sales were 20,247 units—the lowest for May since 1952. January–May were down 51.4% from a year earlier.UK SMMT released May new car registrations showing an 89% year-on-year drop, following April’s 97% drop, representing a steep decline. Lockdown hit car dealers hard. May registrations were 20,247 units, the lowest for May since 1952. January–May were down 51.4% year-on-year.

Germany’s Federal Motor Transport Authority (VDA) May car production fell 66% year-on-year to 151,500 units. The drop narrowed from April’s 97%, but the impact remained severe. As a result, January–May production fell 44% year-on-year to 1,182,200 units, the weakest since 1975. Exports also slumped: May exports down 67% to 105,100 units; cumulative exports down 43% to 904,300 units. Domestic sales recovered somewhat as dealerships reopened in May, but domestic registrations fell 50% to 168,100 units, with no early recovery in demand. For the year, the total was down 35% to 990,300 units. Looking at orders that determine future business, May domestic orders fell 46% and export orders fell 32%, suggesting no immediate recovery.Germany’s VDA May passenger car production fell 66% year-on-year to 151,500 units. The drop narrowed from April's 97%, but the impact remained severe. As a result, January–May production fell 44% year-on-year to 1,182,200 units, a decline at levels not seen since 1975. Exports were weak as well: May exports down 67% to 105,100 units; cumulative exports down 43% to 904,300 units. Domestic sales resumed in May, but domestic registrations fell 50% to 168,100 units, with no rebound in car demand. For the year-to-date, down 35% to 990,300 units. Looking at orders that determine business prospects, May domestic orders fell 46% and export orders fell 32%, indicating no near-term recovery.

【Major Stock Indices Trading Strategy】【Major Stock Indices Trading Strategy】
FTSE, DAX, Hang Seng, NIFTY, Bovespa, and Russian stocks strategies are listed below for reference. Diversifying across several stock indices can help portfolio performance as gains from other holdings support the overall portfolio. It would be helpful for assessing global stock market trends. If you have the means, consider including these in your trading universe.FTSE, DAX, Hang Seng, NIFTY, Bovespa, and Russian stocks strategies are listed below for reference. Diversifying across several indices can help other holdings support the overall portfolio. It would be helpful to monitor global stock market trends. If you have extra funds, consider including these in your trading universe.

＜Major Stock Markets Short-Term Trading Strategy＞＜Major Stock Markets Short-Term Trading Strategy＞
FTSE: LongFTSE: Long
DAX: LongDAX: Long
Euro Stoxx: LongEuro Stoxx: Long
Shanghai Composite: LongShanghai Composite: Long
Hang Seng: LongHang Seng: Long
H-shares: LongH-shares: Long
NIFTY: LongNIFTY: Long
Bovespa: LongBovespa: Long
Russia: LongRussia: Long

【Japan Stock Market Commentary & Analysis】【Japan Stock Market Commentary & Analysis】
Nikkei 225: 22695.74 (+81.98) <+0.36%>Nikkei 225: 22695.74 (+81.98) <+0.36%>
TOPIX: 1603.82 (+4.74) <+0.3%>TOPIX: 1603.82 (+4.74) <+0.3%>
Mothers Index: 990.74 (-12.57) <-1.25%>Mothers Index: 990.74 (-12.57) <-1.25%>
Nikkei Volatility Index (Nikkei VI): 27.76 (+0.38) <+1.39%>Nikkei VI: 27.76 (+0.38) <+1.39%>
TSE REIT Index: 1703.06 (-31.89) <-1.84%>TSE REIT Index: 1703.06 (-31.89) <-1.84%>

Japan 2-year yield: −0.172% (−0.01)Japan 2-year yield: −0.172% (−0.01)
Japan 10-year yield: 0.026% (+0.017)Japan 10-year yield: 0.026% (+0.017)

Japan stocks extended gains for a fourth session. Buying resumed on expectations of a rebound in the economy as activity reopened. However, concerns over the rapid rise in stock prices also remained, keeping upside limited. Volume: 1,516,320,000 shares. Major global indices, including Japan, rose after the March sell-off, continuing higher without a major downturn, a sign of a speed-limit market. Accordingly, this day saw a sharp rise at the opening, then consolidation. Profit-taking from the previous day impaired gains. Still, the Nikkei briefly dipped into negative territory before closing higher, indicating some bottom support. Investors who missed prior gains or who are short-squeezed likely bought back. Nonetheless, the market remains heated; a correction may be insufficient to cool it, suggesting a mixed environment of profit-taking and buybacks in the near term.Japan stocks rose for the fourth straight day. With the reopening of economic activity fueling expectations of a pickup in growth, buying resumed. However, there remained caution about the rapid stock-price gains, keeping upside limited. Volume: 1.5163 billion shares. Major global stock indices, including Japan, had plunged in March and have since risen without a major pullback, describing a “speeding ticket” market. As a result, the day saw a sharp rise at the open, followed by consolidation. Profit-taking from the previous day likely hindered gains. Nonetheless, the Nikkei briefly dipped into negative territory before finishing higher, suggesting some floor support. Investors who missed prior rallies or who were hurt by short-sellers likely bought back. Still, the market remains overheated and a deeper pullback may be insufficient to cool it. For now, profitability may continue as buyers and sellers mix, creating an unstable market environment.

Next, a caution on the Mothers Index: a pullback could come any time. If it closes below around 975 points, the prior uptrend may pause. A sharp drop is uncertain, but if it reaches such a level, automatic profit-taking would be prudent. This is a key point for market survival.Cabinet Office released on the 4th an estimate that the government's ongoing economic and fiscal policy response to the coronavirus outbreak could lift real GDP by as much as about 6.4% (previously around 4.4%). The estimate includes the second supplementary budget for FY2020 incorporating expanded employment adjustment subsidies, but excludes an additional 10 trillion yen in newly allocated contingency funds. Private economists, however, see uplift only in the 2% range even when including the second supplementary budget. The Cabinet Office’s outlook appears to reflect strong government intent.

【Japan Stock Trading Strategy】
Nikkei 225 futures traded little in after-hours. At yesterday’s open, the index looked likely to reach the 23,000 level but fell just short. Many investors likely view 23,000 as expensive. For buyers, it was also a tidy level for taking profits. While not a complete fill of the gap, from here up moves and down moves may cross, suggesting a potential range market. This view is not uncommon. The market consensus isn’t always correct, but it’s worth noting. It was somewhat surprising that foreign institutions were net sellers in May’s final week of cash Japanese stocks. However, futures continued to be bought back as expected.

During the COVID crisis, exceeding 23,000 yen would raise a simple question: “Why return to pre-COVID levels?” Yet the current rally is largely driven by short-sellers who believed that, and their view proved wrong. Until they admit their error and complete their buyback, prices may not fall. But once that ends, there is little reason for current price levels to hold. A rally cannot be sustained on hope alone. A day will come when reality and fundamentals must be acknowledged. I will not call it a double bottom in any light. I will simply observe the market.

If the sell-off by foreign major short-sellers and the buyers in the Nikkei Double Inverse ETF (1357) do not unwind, this market may not end. Monitor these positions as they appear to be gradually adjusting, but not yet completed. Until they are resolved, the market may not fall, and there is no need to short. As mentioned, there is little value in trying to justify the market with complex fundamental explanations. Follow the rise until a reversal occurs, and then consider the reasons for the move afterward. This is the essence of profiting in a rising market with momentum.

One caution is the Mothers Index. A drawdown could occur at any time. If it closes below around 975 points, the previous uptrend may pause. A sharp drop is not guaranteed, but if such a level is reached, profits should be taken mechanically. This is a crucial point for market survival.

As repeated, the market moves opposite to distressed investors’ positions. Thus, the current market tends to rise as shorts remain against the trend. If they continue to declare the market is “strange” and pile on shorts, prices may keep rising. That is market behavior. Another important point is the behavior of late entrants. Even after such a rise, many remain unable to participate, watching from the sidelines. Eventually they will jump on the last bus that is late to board; by the time they catch up, the bus peak will be reached and it will roll down the hill rapidly.To reiterate, markets tend to move opposite to the positions of those who are suffering. Therefore, the current market moves higher against the shorts. If they continue to claim the market is strange and accumulate shorts, prices will keep rising. That is market behavior. Another important aspect is the behavior of late entrants. Even after this rally, many still cannot participate, watching from the sidelines. Eventually they will jump on the last bus to join, and when they do, the bus is at the peak and the ride down the hill will begin.

When such last buyers come in, it often marks the market peak. Keeping an eye on Nikkei leverage ETF (1570) can reveal these investor behaviors. The margin impairment ratio has fallen to the 15% range, suggesting investors are recovering. If the ratio rises above 30%, the stock price would have bottomed; if it reaches the 10% range, that would indicate a peak. If buyers are plentiful and losses among individual investors are low, that could indicate a stock-price peak. If prices continue higher and the impairment ratio reaches the 10% range, it could be a signal to sell stocks.When such last buyers enter, it often marks the market peak. Monitor the balance of the Nikkei leveraged ETF (1570) to gauge such investor actions. The margin impairment rate has fallen into the 15% range, suggesting a recovery by investors. If it climbs above 30%, stocks will have bottomed; if it drops to the 10% range, that would be a peak. If buyers are abundant and individually driven losses are diminishing, that could signal a peak in prices. If prices continue to rise and the impairment rate enters the 10% range, it may be time to sell stocks.

In the short-term trading strategy, long positions are indicated for the Nikkei 225, TOPIX, and Mothers Index. Until a drop requiring profit-taking occurs, keep a long stance. If a decline occurs, keep positions until a level warrants covering; then consider shortening.In the short-term trading strategy, long signals are issued for the Nikkei 225, TOPIX, and Mothers Index. Until a drop that requires closing positions occurs, the stance of following the current rise remains unchanged. Until the time that a decline reaches a level warranting action, keep positions and ride the trend. The current level for profit-taking on the Nikkei 225 is below 21,850 yen. A quite low level, indicating the market is strong. A sharp drop could occur at any time, and predicting it in advance is impossible. Therefore, until such movement occurs, it is prudent to maintain long positions to maximize profits. This stance will boost earnings.

Long-term portfolio strategy remains unchanged. Do not increase long-term positions at current levels; only add on meaningful declines. Target dips: 16,800; 15,600; 14,400; 13,200; 12,000. Also plan to scale into further declines at 10,800 and 9,600, with funds allocated accordingly. While declines like these are unlikely, markets are unpredictable. Keep about 30% of total assets in cash to be ready for long-term buying.Long-term portfolio strategy remains unchanged. Do not increase long-term positions at the current level; only buy more on significant declines. Since long-term holdings have gains, hold them as is. Target the next dip-buys at 16,800, 15,600, 14,400, 13,200, and 12,000 yen. Also prepare to buy on further declines at 10,800 and 9,600 yen by allocating funds in portions. Although declines this large are unlikely, the market is unpredictable. Always keep about 30% of assets in cash to be ready for long-term purchases.

In long-term investing, buying with ETFs and taking a spot position is key. Spot holdings withstand declines. Do not use spot holdings as collateral for futures or CFDs. Risks would be doubled. Prices will likely rebound, but global growth is slowing and stock-market returns are unlikely to match earlier years. Over the past 20 years, U.S. stock returns are less than half of historical norms. Growth has slowed and rates remain low, which is unavoidable. We must accept this reality.In stock investing, you cannot catch the market bottom outright, so prioritize splitting funds to gradually buy on dips. If you invest physically via ETFs or other spot assets, you can endure declines. If you can accumulate on dips at low prices, you can eventually grow wealth through stock investments.

Fundamentally, a position in the S&P 500 alone should suffice. Broad diversification across asset classes leads to steadier performance. Since VIX provides a hedge, including it in trading can broaden strategies. The combination of the S&P 500 and VIX is very important.＜Technical Indicators＞
Advance/Decline Ratio: 25-day average 145% / 6-day average 131% (overbought condition persists)
PER: 20.79x / EPS: 1091 yen (reference value)
PBR: 1.10x / BPS: 20632 yen (BPS has somewhat recovered)
Short-selling ratio: 38.4% (rising)
Number of new highs: 79 / Number of new lows: 2 (bullish pattern maintained, but new highs are diminishing)
Nikkei VI: 27.76 (slightly up, not trending down)
Dollar-denominated Nikkei: 208.10 dollars (slightly down, above the 200-dollar milestone)
NT倍率: 14.15x (Nikkei vs TOPIX indicates extreme overvaluation)

Margin debt ratio (as of May 29): 2.30x (down from 2.46x; rise in short positions / fall in long positions)
Credit impairment rate (as of May 29): 15.51% (further improvement from 17.70%)

Investment flow by investor type (as of May 29)
Foreign investors: net selling of 21.676 billion yen
Individual investors: net buying of 3,315.98 billion yen (spot buying 3,059.92 billion yen, margin buying 256.06 billion yen)
Investment trusts: net buying of 548.05 billion yen
Trust banks: net buying of 184.85 billion yen

＜Japan Stocks Short-Term Trading Strategy＞
Nikkei 225: Long
TOPIX: Long
Mothers Index: Long
Nikkei VI:
TSE REIT Index: Long

Nikkei Leverage (1570): Long
Nikkei Double Inverse (1357):
TOPIX Leverage (1367): Long
TOPIX Double Inverse (1368):
Mothers ETF (2516): Long

Nikkei VI (2035):
VIX Short-Term Futures (1552):
REIT ETF (1343): Long