NKY225 Catalyst: NVDA Earnings Market Response
Flagging catalyst for NKY 40,000 resistance ahead of NVDA earnings / Japan AM market open, and how NKY (not NVDA) drove NDX in ‘23.
(This is NOT the “Part 2” of my prior NKY225 40,000 Resistance Note - consider it “Part 1.5”)
Yes, I’m aware everyone and their mother is focused on and discussing NVDA (and this is the calm before the storm of “NVDA” commentary to come starting after hours today). And I hope that you, dear loyal reader, would know by now that I only put out content or commentary if it’s both significant and differentiated. So - let’s discuss NVDA and NKY.
First just for reminder and context - my previous article was a Part 1 of 2 on the DM equity world’s last major resistance level: NKY 225 at 40,000 - currently the most significant index level in play globally.
And within Part 1, I gave an overview of what to expect with Part 2 - basically, dividing the two sections into:
Part 1: How NKY nearing 40,000 + USDJPY above 150 has been impacting SPX & BTC to rally in 2024 (i.e. Part 1: Why US equity investors should care about NKY ATH’s)
…and then once we’ve made clear WHY NKY very much directly matters to one’s pure US equity market interests in Part 1…
Part 2: A deep dive into NKY 225 itself - the mechanics of what has been behind the world’s best performing (by FAR) major DM index over the past year, including the incredible start +15% in 6-weeks start to ‘24 alone.
See excerpt from the article outlining what to expect in Part 2 below:
In this 2-part article, we will dive into this pivotal and generational moment for major global markets: the Nikkei 225 index on the verge of printing a new all-time-record high, and what it means for the broader global market landscape.
In the coming Part 2, will take a multifaceted view of the NKY 225: the bottom up constituents that have been driving the cash index higher from the single-stock perspective (and no, it’s not PURELY A.I. themed - it’s just merely overwhelmingly A.I. themed)
Also in Part 2, we will cover the top-down index perspective as well, with a focus on NKY index futures and options, drilling into the uniquely Japanese market phenomenon of “spot up, vol up”
But before we get into all the nitty gritty commentary and insights on market mechanics of the NKY Index itself, we need to first discuss why this is even worthy of discussion. So, this Part 1 will cover…
…and I would advise you read it if you haven’t yet.
With that said, what you’re reading now is not Part 2 (in full) - rather, this is a heads up/quick overview on an imminent catalyst for NKY coming later today, but to flag separately, and flag now - given the particulars of the catalyst and its time sensitivity.
NKY INDEX POTENTIAL CATALYST: NVDA Q1 Earnings (Wed 2/21 After U.S. Close)
In case you weren’t aware (and worry not, as surprisingly few actually are) - NKY 225 index and NVDA’s respective price action have been remarkably in-line with one another. Not (just) on a intraday basis, but spanning over a decade.
Of course to differing and always changing degrees, but largely correlated / co-related nonetheless.
In fact, this doesn’t look too different from my previous article and commentary on NKY vs BTC correlation:
…and so therefore indeed, NVDA, NKY AND BTC are more or less correlated with and among one another in long term price action:
And why? Well, oddly I suppose it comes down to - fundamentals (in part).
Replace NKY225 index with one of its top constituents 8035 Tokyo Electron - a leading chip equipment manufacturer - and you get an even cleaner correlation with NVDA and BTC:
Why? Because BTC / crypto (mining, transactions, developer activity etc) require compute power - semis / chips / SPE.
But also- lets get our heads out of story land and back to green and red blinking tickers - these three find each others’ company on the farther end of the risk-spectrum.
Nonetheless, this near-mirror image of a chart is critical to keep in mind.
We will discuss NVDA vs NKY for this “Part 1.5 of 2” article, given NVDA earnings after US market hours. But before we do, just take a look at the above chart - what that incredibly close price action between NVDA and Tokyo Electron means is that yes, NVDA shares will likely swing around in after-hours trading as these highly anticipated earnings and conference call comes out. But after-hours trading and price action is just a portion of institutional flow, and is more often a rather poor indicator or reflection of the real cash equity market response (see SNAP after hours from that “basis point decimal error” recently). However, approximately 2 hours afterwards (7pm EST) - we have Japan market open - and there, with 8035 Tokyo Electron shares (among the other A.I. / semiconductor stocks), you may be able to get the most accurate early market read in response to NVDA’s earnings (or at least on broader global A.I. sentiment reaction) just hours after announcement, for a full trading session, and many hours prior to U.S. market open.
As per Across The Spread - every single trading day begins in Asia. So regardless of what the NVDA results are, or what they’re doing after hours, anyone with an interest in how NVDA shares may trade in response for Thursday’s U.S. trading session - I strongly suggest you keep an eye on 8035 Tokyo Electron for at least SOME color.
Ok, back to NVDA and the NKY 225 index.
Long NKY or Long A.I. ?
Importantly, this NKY ⇄ NVDA correlation / co-relation had really tightened up from 2023 to current - which happens to be the most significant eras for both NKY and NVDA respectively - as both saw major breakouts which were subsequently sustained:
Which is why NVDA Q1 2024 after-market earnings released later today (Wed 2/21) - or rather, the market price reaction (who gives a F about earnings themselves in green & red blinking ticker land) deserves focus and attention.
Note what I just said - the market price reaction deserves focus and attention, not “NVDA shares price reaction.”
That’s not to say blinking ticker symbol NVDA doesn’t matter - it most certainly does (or, can). What I mean by “the market” reaction is yes - NVDA after-hours trading, but also (and mainly) the NKY 225 index, and global/Asia semiconductor stocks.
Because if NKY is to blast through its 40,000 all time high resistance level in the near term (meaning - within this current leg of upside), it will be the chip & A.I. sector index heavyweight names that drive the move - just as they had been from the start of Jan 2024, and just as they had been in from the May 2023 breakout. Breakout for both NKY and for global A.I. / NDX.
2023: NVDA (A.I.) vs NKY
At first glance, NVDA and the NKY 225 Index price action appear almost one and the same in terms of direction, breakout and pivot points, momentum and velocity etc (price action behavior overall). And indeed that is largely the case - they both fuel and stymie momentum upon one another:
But of these two major (if not “only”) global equity market themes in 2023 - “long A.I.” and “long Japan” - which led which?
Most will say “A.I. led” - because those that went long A.I., as well as those that refused to, both couldn’t stop watching A.I. and thus were living in an “A.I. is driving everything (for better or worse)” market mindframe as their starting and ending point. Whereas those who were among the earlier “long Japan” folks were either looking at/buying Japan A.I./semiconductor single stocks like Tokyo Electron, Advantest or the many others (which, again, would be done more so from a “buying A.I.” motive than the “buying Japan Inc” theme - no different from being long Taiwan’s TSMC, Korea’s Samsung & SK Hynix - “long Asia/global A.I. & semis”) - OR, looking at their longs in Japan from the Buffett-value seeking sense. In fact, many among the value-seeking longs likely saw the A.I. craze and wanted nothing to do with chasing runaway valuations, and invested in Japan instead for that exact opposite reason - and therefore, subconsciously or otherwise, their chronology would still likely be “NVDA & A.I. madness came first, then (or, HENCE) long Japan.”
And for those who did happen to observe A.I. and Japan surging side by side in spring of 2023, the outright narrative was that it was NVDA’s Q1 earnings and massive guidance shock at the end of May that had ignited NKY (and certainly NDX) to break out.
And as I had covered in depth on many episodes of my previous podcast Market Depth throughout that period - that chronology (and therefore that market-driver identification) is questionable at best, but likely just outright incorrect. And this is a critical distinction- “long A.I.” vs “long Japan” - which was fueling which? And that may give some insight into present day: which IS fueling which currently, as NVDA and NKY are both poised to potentially break out to new record highs, or sharply pull back.
If we roll back and review the tape - no, it was NOT NVDA’s massive +25% surge following their monster earnings release on May 23rd 2023 that had ignited the otherwise sleepy and rangebound NKY.
What’s more - NVDA’s May 23rd surge did NOT single-handedly cause the Nasdaq100 to suddenly break out +15% from May ~ June either.
It was actually the NKY that triggered the initial NDX breakout (with NVDA adding fuel to the existing momentum), and NKY that eventually halted that first leg of upside. (And by “NKY” I mean “NKY investors/capital”).
The Chronology
A.I.’s breakout catalyst was NVDA’s earnings guidance beat on May 24th after market hours.
But NKY’s breakout catalyst was when the index broke clean through its very stubborn 30,000 resistance - which occurred on May 17th, 5 trading days prior to NVDA earnings.
Here is a chart I just dug up from when I had been discussing this “NKY is leading NDX” phenomenon last year. Here are NKY futures vs NDX futures after NKY had broken >30,000, and NDX, which had no reason of its own to suddenly break out at that moment, followed NKY and also broke out.
As you can clearly see above, NKY jumped +9%, and NDX +7% in the first 2-3 weeks of May 2023, BEFORE NVDA on May 23rd.
So- NKY driven momentum was already in place, and moving the Nasdaq 100 before the A.I. theme took hold (“took hold of media and narratives,” that is - not “took hold of markets”).
Also note the y-axis scale - these 2 index futures were moving % for % together. And the NKY & NDX moving % for % in close (if not exact same) magnitude remains consistent for each directional up/downtrend move thereafter.
That’s also quite incredible - for the left-for-dead, value trapping, price weighted NKY225 index with top weighting as 9983 Fast Retailing (UNIQLO), to move % for % with the high flying, mega-tech SECTOR index, the Nasdaq 100. Or, it would be incredible, or unbelievable, if you didn’t believe that NKY was indeed driving (responsible for propping up what would otherwise continue be lifelessly flat prior to) NDX.
But indeed, that first breakout rally for NKY & NDX triggered by NKY > 30,000 saw both move together, % for % for the first 8-10 weeks of consecutive gains.
Looking further under the hood - the NKY225 index does indeed have some “A.I.” plays - which are semiconductor companies that have considerable weighting within the price weighted index. Two such stocks within the top 10 weightings of NKY225 constituents are:
8035 Tokyo Electron
8657 Advantest
And going back to measuring in constant percentages, if we a look at the % performance of NVDA, Tokyo Electron, and Advantest starting from the very next day after NVDA’s +25% single day post-earnings gain ~ current - we’ll see that Japan “A.I.” has kept in lockstep pace with NVDA.
OR, is it NVDA that has kept in lockstep pace with Tokyo Electron & Advantest - as perhaps NVDA shares have been driven by, if not guided by Tokyo Electon & Advantest?
Just as NDX being driven by NKY from the index perspective?
Fund Flows
The following too was meant for Part 2 of this note (and will re-elaborate in Part 2) - but one final point on “long Japan” vs “long A.I.” in 2023.
As we know, the NKY rally of 2023-2024 has been almost purely foreign capital driven. And therefore, Ministry of Finance's weekly release of Stock Investment By Foreigners (Net Buy / Sell Amount) is something to keep an eye on.
Here’s the summary for 2023.
First - you’ll notice these two weeks in April 2023 with massive, nearly off-the-chart amounts of net buying by foreigners - but you will also notice that that’s not actually coinciding with the NKY225 upside breakout - in fact, price level doesn’t really do much until mid-May:
That’s because those first 2 (technically 3) weeks of massive buying in early April - those are merely negating the 4 consecutive weeks of very heavy selling that had preceded it in March - during “SVB/Credit Suisse crises” times. The 4 consecutive weeks of net selling made foreigners very underweight Japan, and so from April (which begins a new Japan fiscal year), those first 2 weeks of enormous buying is just getting back to flat in portfolios - and can be “X’d out” (just as the sell flows preceding it can be X’d out - reflected by flat price action throughout all of it).
That’s why its not until mid-May, when you see foreign weekly flows suddenly jump to JPY800bn from previous 300/week, that the NKY index starts to jump - because that’s foreign inflows far above and beyond what’s merely just “maintenance” - this is the start of the marginal bid.
And in mid-May, during the week in which foreign inflows more than doubles week over week - that’s what pushes NKY through 30,000. And the 5 straight weeks of buying (totaling 12 consecutive weeks of net buying by foreigners) is what pushes NKY ever higher on momentum. As well as NDX higher on equal momentum.
Indeed, the NKY was driving NDX.
And it's not so ridiculous in concept - as you can see, these are foreign flows driving NKY higher - as in, American flows (as well as European, but largely American). As I said at the time, the NKY and TOPIX indices might as well be U.S. indices, because it’s U.S. capital that’s dictating price action and activity. Just as its U.S. capital that’s dictating global A.I. stocks.
Final point on NKY driving A.I.
In spring of 2023, active capital was flowing into one of these two equity themes: long A.I. and long Japan. As I’ve already shown - long Japan started before long A.I., which was kicked off with NKY >30,000 and NVDA earnings respectively. Thereafter, we see consecutive weeks of inflows into both themes.
Then, for the week ending June 9th, we finally see the first break in the consecutive weeks of A.I. inflows. BUT - Japan inflows remained intact for 2 more weeks.
Both the NKY index AND NDX continued to march higher, DESPITE the A.I. outflow that had emerged. It wasn’t until 12 straight weeks of foreign inflows into Japan equities had finally paused for its first week of net selling that had finally put a stop in the relentless upside for BOTH the NKY and NDX.
3 months of inflows into Japan. Within that - 2 months of inflows into A.I.
A.I. inflows give up first - but the indices do not top.
Japan inflows finally flip to net outflows after 12 weeks - marking the top of NKY for that moment, and the end of the NDX rise for that moment.
Japan led NDX in 2023, not the other way around, and not even NVDA-led. And again, this only “sounds ridiculous” (to probably U.S. based American investors of American markets only) because of how that literally sounds. “Japan” in this context means “foreign/U.S. capital" that happens to be bidding up Japan. It has nothing to do with Japanese investors.
NVDA Post Earnings Implications
Having said all that - NVDA may very well be the driving catalyst to get NKY to break 40k. And if it disappoints / sees sharp profit taking or options activity induced volatility and crashes, that may very well further cement the 1989 NKY all time high in place for some time. And it won’t necessarily be NVDA itself - but rather, NVDA-triggered renewed momentum / profit taking in global A.I./semis.
The key contributors to NKY’s monster month, in which it has blown way ahead of TOPIX index, is Tokyo Electron, Advantest and Softbank - all 3 as A.I. / semiconductor plays (SoftBank rally due to its stake in ARM Holdings, which had nearly doubled). NKY is coasting off of this sector right now, and for the last >5% of upside, not from “corporate governance reform” type of themes.
So - NVDA earnings - whatever happens with them, watch “Japan” for foreign capital’s reaction to the state of global A.I. in markets - particularly Tokyo Electron.
And as per my part 1 - if NVDA rallies, and NKY rallies off of its semi names, and USDJPY is at current levels of 150 - then a Mag 7 rally may very well follow, due to Japan investors continuing to flood into U.S. tech (or out of JPY) via their NISA accounts.
Please stay tuned for the real Part 2 of this 2 (and a half) part piece on the NKY225 at 40,000.
(One last chart - I will get into this phenomenon of NKY “spot up, vol up” in Part 2, but just wanted to point out that this is also the case for NVDA shares as well - NVDA call options activity is going nuts into this event. NKY and NVDA: spot up, vol up)
If you haven’t read Part 1, I suggest you do so to find out how and why NKY at all time highs and USDJPY at three decade highs has significant implications for US equities (like NVDA) and BTC.
I will include commentary from post NVDA in Part 2 (if necessary).
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Thank you as always,
Weston