Japan’s Nikkei 225 and Topix exploded higher: more upside?

Japanese stocks continued their uptrend as investors embraced a risk-off sentiment in the market. The closely followed Nikkei 225 index surged to a high of ¥33,973, its highest level in over 33 years. It has surged by more than over 31% from its lowest point in 2023. Similarly, the Topix index rose to a high of ¥2,430, also 30% above last year’s low.

The Nikkei 225 and Topix indices surged hard as investors embraced a risk-on sentiment in the market. It was a continuation of what happened in the United States on Monday when the Nasdaq 100 index jumped by more than 2%. The Dow Jones and S&P 500 indices also rose by over 0.50%.

The jump also coincided with the sharp decline of crude oil prices. Brent, the global benchmark, retreated by more than 4% on Monday after Saudi Arabia slashed prices in a bid to gain market share. 

Japanese stocks were also not the only ones surging. In India, the Nifty 50 and BSE Sensex continued their uptrend to 21,695 INR and 71,951 INR, respectively. In Pakistan, the Karachi 100 rose by 0.20% while the KOSPI spiked by over 0.10%.

The Nikkei 225 and Topix indices have been in an uptrend in the past few months as foreign investors have moved to the country. More inflows to Japanese stocks jumped after Warren Buffett added to his holdings in 2023.

Most investors believe that Japanese stocks are inherently undervalued than their global peers. While the S&P 500 index has a PE ratio of over 20, the Nikkei 225 has a PE multiple of less than 15. 

They also rallied because of the dovish nature of the Federal Reserve. While the Fed, ECB, and the Bank of England hiked rates in 2023, the BoJ has maintained negative rates in the same period. The only change in policy was its decision to tweak its yield curve control program.

The Nikkei 225 index rally is different from that of the S&P 500 index, which has been dominated by the Magnificent 7. In Japan, only a handful of companies have retreated in the past 12 months. 

The best-performing Nikkei index companies in the past 12 months were Kobe Steel, Kawasaki Kaisha Kisen, Advantest, Sapporo Holdings, Toppan Printing, and Mitsui Electric. All these shares have risen by over 100% in that period. The other top-performing companies in the index are Keisei Electric Railway, NEC Corp, and Toyota Tsusho.

On the other hand, the worst-performing companies in the Nikkei 225 index were Nippon Telegraph & Telephone (NTT), Denso, Sumitomo Pharma, and Toho Zink.

Nikkei chart by TradingView

I have been bullish about the Nikkei index for a while, as you can read here. Turning to the daily chart, we see that it has formed an inverse head and shoulders pattern, which is one of the most bullish signs. It moved above the neckline at ¥33,745 on Tuesday.

The Nikkei index has risen above the 50-day and 100-day Exponential Moving Averages (EMA). Similarly, the Relative Strength Index (RSI) has pointed upwards. Therefore, the outlook for the Nikkei is bullish, with the next level to watch will be at ¥34,500. If this happens, the Topix index will also follow suit because the two are highly correlated.

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