Nikkei 225 to Extend Rally on Bullish Candlestick, Nomura Says

Japanese stocks are poised to extend their world-beating rally in 2014 after the Nikkei 225 (NKY) Stock Average formed a bullish technical pattern for a second straight year, according to Nomura Securities Co.

The Japanese gauge rose on Dec. 30 to 16,291.31, the highest close of 2013, creating a 12-month white candlestick pattern with almost no upper wick. The same pattern occurred in 2012, preceding the Nikkei 225’s 57 percent gain last year. It’s the first time in 24 years that the signal was formed in back-to-back annual periods. A candlestick shows the open, close, highest and lowest levels for a period, and has a white body if the close is higher than the open.

The Nikkei 225 last year capped its biggest gain since 1972 as Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda sought to end deflation with fiscal easing and by pumping unprecedented cash into the economy through bond purchases. A gauge compiled by Nikkei Inc. shows the index trades at 16.6 times estimated earnings, 22 percent below the 10-year average multiple of 21.4 times.

“The market is still in the young phase of its rally, it’s not overheating yet,” said Takashi Ito, an equity strategist at Nomura, Japan’s biggest brokerage. “Japanese stocks rallied the last two years because of Abe’s strong will and his efforts at injecting monetary and fiscal stimulus. That’s going to continue into 2014.”

Japanese stocks gained the most among 24 developed markets tracked by Bloomberg last year as the yen’s 18 percent slide against the dollar boosted exporters’ profits, lifting shares from Toyota Motor Corp. (7203) to Panasonic Corp. The BOJ last month maintained its pledge to expand the nation’s monetary base by an annual 60 trillion yen ($575 billion) to 70 trillion yen, as Kuroda commits to spurring a stable inflation rate of about 2 percent.

Business Sentiment

Sentiment among large manufacturers rose to a six-year high, according to a quarterly central bank survey published last month, while separate data showed industrial production increased for a third straight month in November.

In 1988, 1989, 2012 and 2013, the Nikkei 225 reached an intraday high for each year in the final days of December before finishing each period at its highest daily close. That produced the patterns of white candlesticks with almost no upper wick. The wicks represent the differences between the highs and lows, and the opening and closing levels.

When the signal occurred for a second straight year in 1989, the gauge finished the year at an all-time closing high of 38,915.87. The equity index slumped 39 percent in the following 12 months as Japan’s asset bubble burst.

“It’s a completely different situation now, stocks are definitely looking cheaper,” said Nomura’s Ito. “Valuations now still haven’t reached their long-term average.”

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

To contact the reporters on this story: Satoshi Kawano in Tokyo at skawano1@bloomberg.net; Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

To contact the editor responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net

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