How much more short term downside is there in Japan?

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It is becoming clear just how much optimism was priced into the success of Japan’s monetary policy bazooka with another 5% drubbing overnight. 

As JPMorgan’s Michael Cembalest notes, P/E multiples rose from 11x to 17x since last Labor Day, and breakeven inflation implied by Japanese JGB-i bond markets rose to 2%, a level Japan has not seen consistently since 1990. 

On top of that, net long positions on the Tokyo Stock exchange were close to the highest levels in 20 years, and foreign participation in Japanese equity markets was also elevated (even Jon Piper and Caaaawky had gotten long at the top!!! He he). 

It did not take much detailed market research to see that Japan had become a crowded and popular trade – precisely as we flagged in the days ahead of the first rout (see here – 

But what happens next? After a 70% run-up over 6 months, how have stocks performed? The answer may surprise many…

The record shows that in 10 out of 14 cases, prices reversed completely or collapsed. For the record, we do not believe this will be the case in Japan in this instance, but would not be surprised to see a further retracement to 12500-12800 in the Nikkei.

Incidentally, just as when I floated the short Japan idea via a few people it was asked of me if I was mad (that made the conviction greated), notice in recent days how some of the mid cap miners and gold plays are rising? The bulletin boards are quiet and there is no commentary – this is exactly how bottoms are made.

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