TOKYO -- Investors in Japan and the U.S. are chasing quick gains in momentum stocks, but they need to watch out for a Fed-inspired U-turn.
Jasdaq-listed Japan Communications, a discount mobile carrier, became the second-most-traded stock by value in Tuesday's market, topping rival SoftBank and Toyota Motor. Broadband services provider WirelessGate, whose shares trade on the Tokyo Stock Exchange's Mothers market for startups, came in fifth place.
Retail investors are behind this flurry of activity in fast-moving shares. A round of stock buying by Japanese pension funds appears to have run its course, and the market as a whole has been plodding along.
"There's been a convergence of money from individual investors fed up with the sluggishness of large caps, creating something of a boom in tech stocks," said Tsutomu Yamada, market strategist at online brokerage kabu.com Securities.
These investors are not simply taking a leap of faith. They have been genuinely attracted by the growth strategies of companies such as Japan Communications and robot suit developer Cyberdyne.
A similar dash for growth is underway in the U.S. Streaming video provider Netflix and travel website operator TripAdvisor have shown plenty of momentum recently, hitting all-time highs last week. Interestingly, TripAdvisor's share price has almost mirrored the Mothers' market index since the end of February.
"U.S. equities have reached the upper limit of fair value by various gauges," said Junya Naruse, chief strategist at Daiwa Securities. "Money in need of somewhere to go is flowing into high-growth stocks."
Even some foreign hedge funds seem to be reaching for Japanese tech stocks. Momentum chasers were emboldened by a comment from U.S. Federal Reserve Chair Janet Yellen last month, in which she stressed that the Fed has "no mechanical formula" for determining when to raise interest rates. To some, this said that easy money will remain plentiful for a while.
But last month's big improvement in U.S. payrolls has raised speculation that a rate hike could come as soon as next spring, around six months earlier than many had expected. So much for Yellen's guidance.
"Tech stocks have been overbought with speculative money," warns Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. "If that money reverses direction, they will be the first to be sold off."
Tesla Motors, a darling among momentum stocks, has retreated nearly 10% from its near-term peak in late June. Japan Communications and Netflix are trading at more than 100 times forward earnings. With all these flashing yellow lights, prudent investors may want to tap the brakes.