Nikkei Recouping Losses, Strategists See An Entry Point

The Japanese Nikkei is in rally mode, the yen is weakening and very few people are talking about it. Why isn’t the index getting the attention it deserves on the way up the same way it did on the way down?

Who said the media was fair? It was only weeks ago that markets all over the world were in the middle of a meltdown. The Nikkei reached a high of 15,627.26 and went into a free fall, eventually reaching a low of 12,445.38—an amazing 20 percent drop in 16 days.

The yen, which broke above the 100 mark, strengthened to around 94 against the dollar—roughly six percent. To currency traders, six percent is a huge move.

Struggling to give the downside move a reason, the media and analysts pointed to Bernanke’s comments that indicated that the Federal Reserve would begin tapering its asset purchases and while that may have been the catalyst, others believe that the Nikkei, along with U.S. indices desperately needed a correction.

Nicholas Smith, Japan strategist at research firm, CLSA, told CNBC, "The Japanese market was not over-valued, it was over-heated. The market was looking for an excuse for a pullback or a clean out and the 'taper tantrum' worked to trigger that.”

The meltdown was widely covered in the media, but now those same markets are melting up and a much smaller amount of investors appear to care.

Since reaching the 12,445.38 low, the Nikkei has rallied to 14,099 as of the close of trading Tuesday. That’s a 13 percent rally in 12 trading days. On Tuesday, the index closed above its 50 day moving average marking a key level of resistance that the index broke through without trouble.

The yen sits at 99.74 against the dollar—once again near the psychological 100 level. As it continues its downward move against the dollar, and U.S. indices strengthen, the recipe is in place for further upside action in the Nikkei.

For those who rode out the volatility in the Nikkei and held etfs like the popular WisdomTree Japan Hedged Equity ETF (DXJ), they’re now being rewarded but according to some analysts, the move isn’t over.

CLSA’s Smith said of the Nikkei, "This is the one chance to get back, you won't get a chance like this again,"

Strategists agree that the volatility will remain and with Japan’s upper house of parliament elections taking place on July 21, this could be the next big news event that moves the country’s markets.

For now, investors can take advantage of the once crowded trade that players exited en masse. If the Nikkei continues higher, people will again take notice.

BY Tim Parker