The main Japanese stock index is at an interesting juncture

 

Above are my estimated probabilities of the Nikkei index 1) rising 2) staying largely rangebound within 1,000 points of 42,000-43,000 & 3)dropping sharply by breaking the uptrend line in green. The first scenario would likely be less than 35% in probability if not for the reverse head & shoulders formed from March to June. The 3rd scenario would be less than 50% if not for the market heading into the treacherous Sep-Nov timeframe which saw big selloffs in 2008, 2011,2012,2015,2018, 2022, 2023 & 2024. The 'double bottom' legs of last August & this April has, conversely, likely strengthened the odds in favour of the bull.

The bullish scenario [ breakout from bullish pennant ] will likely materialize if US unemployment & other economic data predispose the Federal Reserve to cut interest rates by at least 0.25% thus obviating the need for the Bank of Japan to raise its own base rate to above 0.5%. Conversely,  on-the-fence data from the US would likely increase the likelihood of 2) while 3) will be spurred by either black swan events or the abovementioned data coming in far worse than market projections. 38,500-39,600 will be the first line of defence in the bearish scenario while the upside target is 45,600-45,800 as surmised in an earlier post.

However, another idea struck me today that today's market environment may be paralleled obliquely by the high inflationary periods in the 1970s where the market bottomed in Dec 1970 & again in Oct 1971 before rising 95% throughout 1972, peaking in Jan 1973 & then descending sharply in a 2-year bear market that climaxed in Dec 1974. The Fed funds rate dropping from 5.5% in 1971 to a nadir of 3.5% in Feb 1972 help spark the huge rally throughout the latter year. Although direct comparisons can't be made with the 2020s, the same rate has fallen from 5.5% from 2023/2024 to the current 4.5% and looks more likely to fall than not, being projected to be closer to 3.75% by next year, potentially sparking a less spectacular rise further into record territory. 

In light of the abovementioned probabilities, I have raised my cash allocation to over 35%, a record high for my Japanese portfolio but am eyeing many still undervalued, barely moving ultra small-to-mid cap stocks as I predict the broad theme would likely be foreign funds [ & speculators + NISA investors ] shifting from mega caps & tech outperformers of years past like Tokyo Electron to underperformers, similar to how money flowed out of  NTT, banks & securities firms when their prices peaked in Apr 1987 & spurred most the secondary market  to significantly higher levels by 1988-1989. Or, relatively more recently, how tech & telecom stocks peaked in Jan-Mar 2000 before many smaller companies' equities rose to peak from Jun-Nov of that year even as the Nikkei dropped sharply from 20,833 on Apr 12 2000 to 15,667 by Aug 4 2000.