A massive surge in new highs for Nikkei 225 members

Key points:

• The percentage of Nikkei 225 stocks registering a 4-week high surged above 60%
• After similar thrusts, the bellwether index was higher 77% of the time over the next two weeks
• Other breadth and relative strength indicators paint a favorable picture for Japan

The weight of the evidence continues to suggest maintaining an allocation to Japan

In a research note in May, I highlighted the massive breakout in the widely followed Nikkei 225 Index. Since that report, the bellwether index is up a little over 8% in local currency terms. For USD-based investors, I recommended an allocation to the currency-hedged ETF (DXJ), which has surged by an impressive 19%, far surpassing the S&P 500's 7% return. 

After consolidating for the last two and half months, the Nikkei 225 is on the cusp of breaking out again, and participation from individual members within the index is surging. 

On Friday, more than 60% of Nikkei 225 members closed at a new 4-week high, reaching the highest level in two years.

Similar surges in 4-week highs preceded positive returns 

When the percentage of Nikkei 225 members closing at a 4-week high exceeds 60%, the bullish price momentum is likely to continue in the near term, with the index rising 77% of the time over the next few weeks. At some point over the next month, the bellwether index was higher in 20 out of 22 precedents.

Participation is broad and includes various time frames 

It's not just Nikkei 225 Index members that are surging. The Topix Index, which contains over 2000 Japanese stocks, has seen the highest surge in 52-week highs since 2017. Readings above 10% generate healthy annualized returns.

The percentage of Topix Index members trading above their 200-day average has risen to the highest reading since 2021, a level associated with favorable annualized returns.

Some perspective on the recent DXJ outperformance

The WisdomTree Japan Hedged ETF (DXJ), which I recommended in May, has seen a surge in 6-month relative highs versus the S&P 500 over the preceding three weeks, matching the second-highest level in history. 

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What the research tells us...

Japan, a country where its central bank has remained accommodative, appears poised to sustain its impressive momentum following a substantial increase in 4-week highs among Nikkei 225 constituents. After similar participation surges, the bellwether index was higher 77% of the time over the subsequent two weeks. A broader measure of Japanese stocks, the Topix Index, also shows healthy market breadth trends for a significant number of issues, confirming a bullish backdrop. For now, the currency-hedged Japan ETF (DXJ) continues to outperform the S&P 500.