Mounting Bearish Bets on Japan Stocks Is Nothing to Worry About, Analyst Says

(Bloomberg) -- Japan’s market is a on roll, with the Nikkei 225 Stock Average trading near a one-year high. And investors shouldn’t anguish over a rising number of bearish bets.

While there are almost twice as many put options as calls on the benchmark gauge -- the ratio between the two has hit a level not seen since February 2006 -- the increase in outstanding puts is partly due to traders selling those contracts because they don’t expect stock prices to fall much from current levels, according to Makoto Sengoku, a market analyst at Tokai Tokyo Research Institute Co. in Tokyo. The Nikkei 225 has rallied 17% in 2019, heading for a seventh year of gains in eight.

“It’s inevitable as the number of people wanting to sell put options is increasing, while we’re in a phase where volatility is declining,” Sengoku said, referring to the rising put-to-call ratio. Still, the trend isn’t completely bullish either as if that were the case investors would buy call options or futures, he added.

The current state reflects that while investors are optimistic about stocks, they’re considering risks arising from the Hong Kong unrest and ongoing U.S.-China trade negotiations, Sengoku said. In a phone call Tuesday, the two nations “reached consensus on properly resolving relevant issues” and agreed to stay in contact on the remaining points for a “phase one” trade deal. The Nikkei 225 climbed as much as 1.4% on the day, before paring its gain to 0.4%.

“I think it’s clear that investors are trying to embrace any positive-sounding headlines as a reason to buy, but it’s also likely a headache for the markets with data mining algos reacting before digesting what is really being said,” said Takeo Kamai, head of execution services at CLSA Securities Japan.

To contact the reporters on this story: Min Jeong Lee in Tokyo at mlee754@bloomberg.net;Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Cecile Vannucci, Margo Towie

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