Market sentiment in Japan has markedly improved in recent trading, with the benchmark N225 up more than 7% in the past two weeks — advancing 1.8% last week to end at 15,956.37, breaking through 16,000 (to 16,107.65 intra-day) for the first time in a month. This week we have four key items, including [1.] domestic machinery order data for October out on Monday (12/10), [2.] the FOMC rate decision on Tuesday (12/11), [3.] the BOJ’s tankan release on Friday (12/14) and [4.] it’s also December options settlement (SQ) on Friday.

As of Friday’s close, the Nikkei 225 was trading at 1.82x times book, 17.29x forward earnings, 18.22x trailing earnings, with a forward yield of 1.27% vs. a trailing yield of 1.14%.

Nikkei 225 futures in Chicago lost 80 points on Friday (-0.5%) to close at 16,010. N225 futures in Osaka finished earlier Friday at 15,940, up by less than a tenth of a percent. N225 futures in Singapore rose by less than 0.05% to finish at 15,915.

The TOPIX 1st Section 25-day A/D ratio of 83.5% is up from unprecedented low levels in the 60s a few weeks ago, but still represents an attractive entry level overall. All other benchmarks are at between 72% to 78%.

Overseas brokerage orders of Japanese stocks turned to net-buying late in the week, but they were still net-sellers for the whole week.

The recent rally, partially based on speculation of a 0.5% FOMC rate cut (now more likely 0.25%), feels like deja vu. Japanese stocks have done quite well, surprisingly not facing extended selling pressure (read profit-taking) except for a fairly decent drop last Tuesday and moderate selling on Monday, after gains of more than 5% the week prior.

U.S. stocks took a breather in a mixed session on Friday, following the better-than-expected employment data release and coming off recent upside in equities. The Nikkei meanwhile, will re-test 16,000 and for the sake of sentiment, a recouping of, and close above the psychologically important level will be closely watched.

Regarding the potential of a 0.5% FOMC rate cut, which would seemingly lead to a big rally in the U.S. and overseas, the irony is (1) it further confirms the dire situation in credit markets and in real estate and (2) it makes equities increasingly dependent on further monetary policy gifts vs. deteriorating economic indicators, such as the Univ. of Michigan’s consumer sentiment reading, which came in at its lowest level in 15 years.

Keep an eye on the yen rate. The $/Y ended around 111.70 on Friday in NY. Earlier in the week it was sub-110, approaching 109.50. The dollar strength comes ahead of a near certain fed rate cut and seemingly more to follow. Easing of crude prices is likely a contributing factor.

Domestic stock newsletters are increasingly making a bull case for domestic-oriented stocks and even exporters in spite of facing an appreciating yen. The mid/small-cap story remains compelling, especially for patient investors. More thoughts on this, time permitting, but in short, selectivity (bottoms-up) seems preferable to broad exposure at this point.