SBM V John Piper & Evil Knievil – It’s time for a tactical short on the Nikkei

Whilst watching the videos on Shareprohets from their recent Investor show, I was comforted to see that self styled “guru” Mr John Piper and my ol “pal” Evil Knievil were distinctly bullish of Japan. We in fact positioned ourselves on the bull side here last November well before the crowd got in (a signature style of ours many regular readers will now be realising. See blog here –http://www.spreadbetmagazine.com/blog/japanese-equities-dont-miss-the-train.html ) and large gains were reaped.

The fact that these two characters are now bullish lends weight to our own short term tactical negative stance! Incidentally, Pipers other “big call” was for continued weakness in the Pound (John – I suggest you read here – http://www.spreadbetmagazine.com/blog/it-always-pays-to-buy-the-front-page-long-opportunity-right.html). He’s also long gold (see video here – http://www.youtube.com/watch?v=xHmPCZgDVis&list=UUNXXk1_sc9pn_eSaJyCoBsw&index=8). Check this out John!! – http://www.spreadbetmagazine.com/gold-bear-guide/

It seems that overseas fund managers have been heavy buyers in particular in recent months and have added the turbo fuel to the domestic buying spree by the Japanese too. From a fundamental perspective the market has moved from being a generational buying opportunity to modestly the right side of fair value now – certainly relative to other equity markets and its 20 year PE and Price:Cash multiples. Our issue now is with the magnitude and extension of the move. Indeed, the move in the Nikkei from last November around 8500 to the highs on Wed of 14,400 is almost 70% – far outpacing the Yen depreciation and also, over the timescale of 6 months, much more than the rebound in the S&P 500 from the crisis lows in early 2009 – one of the strongest bull moves for over 80 years in any global equity market.

Taking a look back at the Nikkei over the last 20 years, we can see in the chart below that on the upside rallies, that whenever the index has traded approx 2000 points above its 7 months exponential moving average that it has acted as a brake on each and every occasion. In fact, on the last 3 occasions, it pressaged a new bear market lurch lower. We do not think this move will result in a resumption to the downside of the long bear market however but, coupled with the excessive optimism around Japanese equities and, as we can see on the monthly chart below, the very high RSI reading similar to the major market peak in 2006 (& that brought the market back almost 20%), that now is a good risk:reward opportunity to go short.

Accordingly, we have opened shorts in the Nikkei in recent days around this level (14200) and stand ready to add the final tranche on a further squeeze towards 14,700 – a level that would be the biggest extension relative to the 7 month ema and RSI in over 20 years – good odds in our book.

These are the types of positions we will be taking in our Titan Macro fund on the official launch next month. To register your interest to participate, just click the image below to enter your details on the website.