Japan’s stock market is quite overbought, and it could affect impact the U.S. if the weakness persists, one market watcher told CNBC’s “Trading Nation.”
The Nikkei on Monday posted its fourth-straight day of losses, following a record string of gains over the last month. A further decline could begin spilling over and impacting domestic markets, said Matt Maley, equity strategist with Miller Tabak. Here’s why:
• The index, aside from its overbought condition, has also seen a large run-up in the last two months, Maley said Monday. To put its move into perspective, the Nikkei’s 21 percent gain logged from early September until last week’s intraday highs was half of its post-U.S. election rally, and 95 percent of its year-to-date gains, Maley said. This leads him to believe the index is quite extended in the short term.
• Furthermore, a key Daily Sentiment Index reading measuring bullishness on commodity traders saw a strong 93 percent last week, Maley wrote. “That means there are a lot of people on the bullish side of the boat. When there are THAT many bulls, it frequently signals a near-term top (because there is nobody left to ‘buy’),” he wrote.
• Some cracks appearing in the Russell 2000 small-cap index and the high-yield market are already flashing warning signs for U.S. markets, and a more dramatic pullback in foreign markets like the Nikkei and the German DAX could add headwinds for U.S. stocks.
S&P 500 vs. Nikkei 225, 1-year comparison
• Finally, crude oil has seen a bounce over the last few months, and higher oil prices tend to be bearish for the Nikkei as Japan imports the vast majority of its crude. The continued upside for crude oil could create a headwind for the Japanese market and the underlying economy.
Bottom line: Maley says that if the Japanese Nikkei weakens further, it could begin hurting U.S. stocks.