Asia Pacific Quantitative & Derivatives Strategy14 February 2024J P M O R G A Nwww.jpmorganmarkets.comGlobal Quantitative and Derivatives StrategyMasanari Takada AC(81-3) 6736-8636masanari.takada@jpmorgan.comJPMorgan Securities Japan Co., Ltd.Tony SK Lee(852) 2800-8857tony.sk.lee@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) Limited/ J.P. Morgan Broking (Hong Kong) LimitedRobert Smith, PhD(61-2) 9003-8808robert.z.smith@jpmorgan.comJ.P. Morgan Securities Australia LimitedDubravko Lakos-Bujas(1-212) 622-3601dubravko.lakos-bujas@jpmorgan.comJ.P. Morgan Securities LLCMarko Kolanovic, PhD(1-212) 622-3677marko.kolanovic@jpmorgan.comJ.P. Morgan Securities LLC* This note is based on data as of 4:00pm JST on February 13, 2024.Nikkei 225 approaching 38,000 range: The Nikkei 225 rally has heated up by more than expected, surging to 38,010 on February 13. With US and German equity markets hitting all-time highs, speculation that Japanese equity will be next appears to be the lone driver. Of course, very few negatives are evident in domestic and overseas markets (volatility has stayed low), and US 10-year yields of around 4.1% (= dollar strength, yen weakness) have made it difficult for both bulls and bears to react (with regard to risk assets), so more than a few investors believe conditions overall are just right for Japanese equities. However, as we explain below, our quantitative and derivatives strategy (QDS) team believes both futures and cash equity are looking increasingly overreliant on momentum and are now out of step with fundamental trends such as earnings and stable buying by overseas investors. Meanwhile, powerful flows led by algorithmic-type trading are currently driving the market toward its all-time high (December 29, 1989, close of 38,915). In current circumstances, we cannot rule out the possibility that speculative players specialized in fast finger trading will continue to monopolize, and it looks as though we will see a game of chicken between (1) the Nikkei 225 hitting a new record high, and (2) a shift in overseas market conditions or a change in the balance of Nikkei future orders leading to warning signs of a near-term ceiling (a typical example of a technical indicator would be a long lower shadow on a daily candlestick). The QDS team�s view on near-term trading suggests a period of observation, based on the belief that (1) investors should prepare for profit-taking by speculators combined with a pickup in volatility (Nikkei 225 VI in the 25 point range) once the Nikkei 225 reaches a new record high, which we believe will not be sustained at this time, and (2) investors bullish on Japanese equity over the medium term should wait for excessive speculative long positions to be closed out (Nikkei 225 in the 35,500-37,000 range could provide a good reentry point).1. Expansion of CTA long Nikkei future positions: First, net long position...
