Japanese stocks may be poised for a rebound as short-selling reached a record high after China devalued the yuan, according to Sanford C. Bernstein & Co.
The short-selling ratio for shares on the Tokyo Stock Exchange rose to 39.2 percent of total trading value on Wednesday, the highest since the bourse began keeping daily records in October 2008. The benchmark Topix index gained 0.1 percent at the close of trading on Thursday, its first advance in three days, while the short-sales ratio fell to 35.6 percent.
“Whenever you see spikes in short-selling, you’ve got to buy,” said Ayush Nagaraj, a Hong Kong-based sales trader and chartered market technician at Bernstein. “Spikes in short-sales don’t happen near tops, but rather at the bottoms.”
The yuan recorded its steepest two-day fall in 21 years after the People’s Bank of China said Aug. 11 it will allow markets a greater role setting its value. The Topix fell 1.5 percent in the two days through Wednesday, joining a selloff in global stocks as the yuan devaluations damped the outlook for Japanese exports to China, its biggest trading parter. It’s still up 19 percent this year.
The People’s Bank of China cut its currency’s daily reference rate by 1.9 percent on Aug. 11 as policy makers stepped up efforts to support exporters and boost the role of market pricing in Asia’s largest economy. The central bank set its reference rate 1.6 percent lower the next day and cut it 1.1 percent against the greenback on Thursday.
The yen traded at 124.57 per dollar after rising 0.7 percent on Wednesday.
“The Topix has come off over the last two days as the yen saw safe-haven buying and following the yuan depreciation,” Nagaraj said.
When short-selling in Tokyo surged to 38.3 percent on June 18, the Topix rose 3.9 percent in the next four days. After Japanese equity investors placed record bearish bets on Jan. 6, the Topix gained for five straight months.
Short-selling surged on Oct. 30, the day before the Bank of Japan unexpectedly increased its unprecedented monetary easing, including pledging to triple stock investments, and the nation’s $1.1 trillion pension fund said it would more than double holdings of local shares. The Nikkei 225 Stock Average soared as much as 15 percent through Dec. 8, when it closed at a seven-year high.