Japan Quant Strategy: Semis' Overreaction? – (1) NKY can weather S.Korean stock selling after-effects up to ~66,250; (2) Bond shorts being unwound; (3) Momentum trades not overcrowded

Today (Oct. 13) the Nikkei Average fell by more than 2.5% versus the end of last week, dropping back to around 67,300 as of 11:00 a.m. Tokyo time. Speculation surrounding Chinese memory-related companies spread over the weekend, continuing the global weakness in the semiconductor memory-related sector. However, we do not believe that market conditions have deteriorated as much as the index's decline suggests. While AI semiconductor-related stocks have also lost momentum in Japan, other sectors have generally remained firm. South Korea's KOSPI 200 has broken below the key level around 970, accelerating stop-loss selling by CTAs, while the Nikkei Average has so far barely avoided the after-effects and, according to our estimates, is capable of holding its ground up to around 66,300. We are of the opinion that CTA selling is not a broad-based deleveraging but is merely occurring alongside a rebalancing of regional allocations (from South Korea to Taiwan and Japan in East Asia, and toward