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Monday July 12, 2004 - 07:54:11 GMT
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Equity Trading Strategies - July 12th 2004

Nikkei may have initiated a new bull rise; NDX 100 extends losses to 1420, but should initiate a rally towards 1560 top

Japanese stocks rose today after the LDP party lost fewer seats than polls had indicated in upper house elections, allowing PM Junichiro Koizumi to push ahead with policies to spur economic growth.


- Japan's ruling coalition held onto its majority in the upper house, allowing Prime Minister Junichiro Koizumi to pursue his policies of curbing government debt and spurring the economy. Koizumi's Liberal Democratic Party won 49 seats -- more than some polls had suggested before Sunday's vote. The opposition Democratic Party of Japan won 50 seats according to preliminary results reported by NHK Television. The LDP's coalition partner, New Komeito, gained 11 seats. Koizumi will probably remain prime minister until 2006, when his term as LDP leader ends, because he needn't face a general election before that and the party has no credible alternative

- The surplus in Japan's current account rose 23.8% in May from a year earlier. The surplus now stands at •1.71 trillion (US$15.88 billion); the eleventh consecutive monthly rise trails the 23.1% growth in Aprilís current account surplus. The increase in the Mayís surplus was substantially larger than the rise of 11.9% expected. Japanís unadjusted trade surplus, part of the current account, rose 37.7%, year-on-year for May. Japanís export-led recovery continues with exports increasing 10% to 4.5 trillion yen in May, while imports rose 3% to •3.4 trillion. Trade with Europe and China remained particularly strong.

Equity Markets Summary

Japanese stocks rose today after the ruling party lost fewer seats than polls had indicated in upper house elections, allowing Prime Minister Junichiro Koizumi to push ahead with policies to spur economic growth. Mizuho Financial Group Inc. and Nippon Telegraph & Telephone Corp. led the gain as all 33 industry groups in the Topix advanced. The Nikkei 225 Stock Average rose 1 percent and the Topix added 1.2 percent at 12:55 p.m. in Tokyo. The ruling Liberal Democratic Party won 49 seats, compared with 50 seats for the opposition Democratic Party of Japan. The Yomiuri newspaper last week said the LDP would win 42 to 55 seats.

Stock buyers found their way back to the market Friday as the past five sessions' losses (down 2.5-5.5% for the Dow, Nasdaq, and S&P 500) presented ample opportunity for bargain-hunting. The move higher, though, was not particularly robust as market internals barely favored the bulls and volume was weak... A sense of apprehension still exists in the market - as indicated by the indices' inability to build upon their opening highs. A raised Q2 (June) outlook from SAP AG (SAP 40.04 +2.08) and a better than expected Q2 (June) report from General Electric (GE 32.17 +0.47) helped buffer the news. Technology, really stole the show with impressive gains from software, semiconductor, and disk drive... The combined strength of the latter sent the Nasdaq to a +0.6% close versus +0.3% for the S&P 500

European equity markets ended the Friday mixed. Market activity was subdued as fresh economic data were scarce. The FTSE in London edged marginally higher while the DAX in Frankfurt and the CAC 40 in Paris ended the day slightly in the red. The positive opening on Wall Street did inspire European bourses as shares narrowed their losses after disappointing corporate reports, but even the upbeat start across the Atlantic failed to propel European equity markets into positive territory. London did marginally better than continental bourses, as the energy sector was lifted by firm commodity prices.

Equity Technicals:

DAX Index - the DAX fell again, reaching to as low as 3883. It may yet extend the downmove to 3870, per expectations, but the time for a reversal is almost upon us. It may happen very soon -- probably as soon as 3870 is reached or if the index rallies above 3960 today. The medium-term outlook remains unchanged -- expect a new upwards cycle thereafter which should go on and challenge the 4175 top further out, and perhaps go on and focus at a 4500 upside target later in the year. The idea, from here on,is not to quibble, but rather start building a long stake at current levels for the medium-term haul.

FTSE 100 Index - the index fell further to 4324 and has rallied smartly since then. Nonetheless, it may yet fall further towards the 4305 - 4290 baseline. Be that as it may, expect a major reversal very soon -- it might even happen if the index breaches 4420 today. The medium-term outlook remains positive. The next upwards phase from there may kick off a new upside sequence which will go on and challenge the 4600 top, and perhaps extend gains further towards 4750 later in the year. Therefore, the idea, from here on,is not to quibble, but rather start building a long stake at current levels for the medium-term haul.

S&P 500 - given a weak finish on Friday, the sell-off may yet extend to 1105, but we won't quibble -- the corrective decline should end very soon as the sell-off reaches extremely oversold levels. Recent action is indeed supportive of the view that a +test of the low+ phase is in process and that the new bull market cycle would shortly resume. The new bull phase may go on and challenge the 1165 top, and thereafter extend gains to 1300 later in the year.

Dow Jones Ind Ave. - we may yet just see it to 10,100, as the weak close on Friday was not assertive enough. But that should be immaterial from an investment point of view -- start building a portfolio for a medium-term haul. We are looking for this middling correction to end soon -- the main uptrend resumes shortly. A new bull market waits in the wings -- and eventually, we expect to see a rally to the 10,800 top, and perhaps further appreciation towards 12,000 later in the year.

NDX 100 - the downmove may yet extend to 1420, but that is not important anymore -- start building a portfolio for the medium-term view. The uptrend should reassert soon. The medium-term view remains strong -- a new bull market has taken the first steps -- we expect to see a test of the 1560 top thereafter, and perhaps further appreciation towards 1750 later in the year.

Nikkei - the index may have bottomed above 12,000 -- and it is time to take the bulls case again -- a new bull uptrend may have already initated, which may have 15,000 - 15,500 as the major goal late in the year.

Hang Seng - the index should ratchet higher from here in order to challenge the 12,600 resistance. Tthe market gets set for a new bull market rally. The uptrend should then resume and may target the 16,500 - 17,000 area later in the year.


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