US stocks rebounds but led by much healthier market breadth
US stock market seems to be shrugging off the September sell-off and going back on track to its uptrend with both S&P and NASDAQ indices advancing strongly, ignoring the negative news on the Covid front and pouncing on almost any positive narrative, from potentially less contentious US presidential election outcome, to more fiscal stimulus plans at some stage and President Trump’s bounce back to health, having reportedly reacted well to the cocktail of Covid drugs he was given. Indeed, the VIX fear gauge has also fallen back to the lows of its past six weeks trading range while dipping below its 50-day moving average for the first time since late August.
More significantly, the US market’s upturn looks far healthier and less concentrated than in August, signified by the rally in Russel 2000 small cap index which smashed above its August peak and reached an eight-month high. Moreover, funds parked in US money markets which we have kept a close eye on, have fallen to another post-pandemic low, with AUM below $4.4trn for the first time since early April, suggesting that more money is being invested into risk assets.
With less than 25 days left before the US presidential election, anything short of a naval skirmish in South China Sea which would now look more like a false flag or a fading prospect of a retaliation by China in blacklisting US companies seem unlikely to stop this market rebound in its tracks. In the words of one respected commentator, “the market just wants to go up, period.” With sectors leading the way breaking that K-shaped trend that had characterised the tech-led market rebound between March to August, we feel more confident of our own stock selection in Japan which has been far less exposed to tech names since early August.
In Japan small cap stocks power on, adding more optimism
In our own market in Japan, however, moves in the US are no longer dictating the direction of stocks and we are no longer looking for major cues in terms of sector movers. This decoupling took place last month when US sell-off didn’t really ripple through in Japan and Suga-san’s appointment as the new PM had injected some excitement about the prospects of him dragging the country into 21st century through his digitalisation drive and introducing long overdue policies to help consolidation of smaller financial institutions.
What is perhaps even more significant is that thus far, in October alone, Japan’s smaller cap indices, best represented by TSE Mothers Index has risen by over 9% with continued big volumes coming in. The index is now reaching its early 2018 highs which if surpassed, it technically leaves it with substantially more upside from here. With Japanese retail money flowing in as it has been in the US market, while cyclicals holdings their own as one would expect when smaller cap names outperform, we think Japan’s highly economic sensitive stock market looks poised for a strong showing among developed markets.
As we noted again last week, the only fly in the ointment is the prospects for the stronger Japanese currency which we think will provide some headwind as the yen continues to trend towards parity against the Greenback. However, with Chinese economic recovery looking increasingly convincing, we think the prospects for continued rebound in end-demand for Japan’s biggest trading partner will far outweigh the negative dampener of stronger yen against the dollar. This is especially so as the Chinese Yuan is starting to appreciate against the Japanese unit.