Japanese stocks continued to face selling pressure last week (-1.7% on the week) until a sharp reversal during the morning session on Friday. In fact, the Nikkei 225 fell below 15,000 early Friday and was in a six-session losing streak until a fractionally higher close Thurs. The N225’s Fri. close of 15,257 doesn’t leave much room for another possible drop below 15,000, especially considering the light trading expected for the week. Note, the Tokyo Stock Exchange is closed Monday for the Emperor’s birthday and Friday (the last day of trading in ‘07) is a half-day. U.S. equities have a half-day on Monday and are closed for Christmas on Tuesday.

Nikkei 225 futures trading in Chicago rallied 475 points (+3.1%) to 15,630 on Friday, compared to a close of 15,320 earlier in Osaka — a difference of 2.0%, setting the stage for any remaining bulls on Tuesday, but of course pending the direction of overseas trading Monday.

As of Friday’s close, the TOPIX 1st Section had a 25 DMA A/D ratio of 83.4%, down from 90%-plus prior to the sustained selling, but up from the 60% level of a few weeks back.

The N225 is trading at 1.72x book, 16.3x forward earnings, 17.3x trailing earnings, with a forward yield of 1.3% and a trailing yield of 1.2%. JASDAQ’s yield is over 2.0%. TOPIX 2nd Section is trading less than 1x book.

The Nikkei online notes the major economic data release of the week is November housing starts on the 27th. A Nomura analyst is quoted saying the bad news of the housing slowdown is factored in for equities. The Nov. data is seen having a limited impact unless the reading is far below estimates.

That 2007 has been a frustrating year for investors in Japan is certainly an understatement. Japan fared worst in the bouts of global selling (remember late Feb. and over summer) and was never able to recover.

On a valuation basis (see metrics above), Japan still looks attractive, but concerns over the health of the domestic economy and cloudy outlook in the U.S., effectively keeps Japan in the dog house … at least for now.

The biggest gains in 2008 could be in the smaller caps, ironically despite the restrained consumer, since small caps are largely immune to external pressures (except naturally for rising input costs) — don’t forget the impact of new institutional buying, old hands and coattail riders, because it doesn’t take much for a big move; but the safest play in equities will likely be among the blue chips, since they offer the most liquidity and are possible targets of bottom-fishing SWFs.