April 3, 2010
This weekend I received two emails asking about the Nikkei's valuation based on a long-term regression-to-trend pattern like the one I track for the S&P 500 and its precursors (here). The chart below is a log-scale snapshot of daily closes in the Nikkei since 1984 — the earliest date for which I have daily data. The callouts show the percentages above and below the trend for the cyclical peaks and troughs.
An exponential regression over this time frame has the Nikkei below trend since the Financial Crisis selloff in September 2008. The price as I write this is about 13% below trend. The trough in 2009 put the index about the same distance below the regression as the Tech-Bubble bottom in 2003. It might seem reasonable to expect the regression momentum to carry the index above trend over the next several months. But Japan faces difficult challenges in recovering from the aftermath of the earthquake. Let's hope the efforts to rebuild ultimately act as a stimulus for economic growth.