The Nikkei Average fell 162 yen to 64,996 on the 26th, marking its first decline in four days. Following a surge of more than 5,300 yen over the previous three sessions, the market took a breather in what is considered a healthy pullback. The move represents a sound correction for rally-leading semiconductor blue chips and may offer timely relief for investors. May 27 marks the final day of trading with rights attached for May contracts, with June trading effectively starting later this week.

Foreign investors net bought approximately 5.69 trillion yen of Japanese equities in April, a monthly record high, with overseas buying momentum continuing into May. Net purchases reached 1.235 trillion yen in the first week of May, the highest in four weeks. While capital inflows from overseas drove the Nikkei's sharp rise, June historically sees foreign investors turn into net sellers. Over the past decade, June has seen net selling in eight instances. Consequently, while the Nikkei may face resistance ahead, market participation could broaden beyond large-cap stocks, potentially creating a more favorable environment for retail investors.

For major semiconductor-related shares, a buy-on-dips approach is preferable. Strong momentum often drives investors to chase higher prices, but buying into strength should generally be limited to situations where specific catalysts trigger concentrated capital inflows. While clear catalysts allow short-term gains from price momentum, trend-following strategies should otherwise avoid chasing highs. For instance, the probability of profitably chasing Kioxia Holdings <285A> after an 8,000 yen surge the previous day is extremely low, even considering the risk of missing out; such situations are better left to AI while observing from the sidelines. Instead, accumulating on pullbacks like today's?with a plan to average down on further weakness?offers a strategy with much higher expected value.

The same applies to ADVANTEST CORPORATION <6857> and Tokyo Electron Limited <8035>. For major target stocks, the fundamental approach is to buy on pullbacks. As long as the upward trend in the AI and semiconductor themes remains intact, averaging down on benchmark stocks during further weakness is likely to be rewarded. However, the outlook differs slightly for small- and mid-cap stocks. For shares with sustained capital inflows and full market recognition, the upward trend is secure, making the buy-on-dips approach as applicable as it is for blue chips, whereas other stocks require more flexible tactics. Within the semiconductor sector, market focus is broadening to laggards, and stocks previously overlooked due to earnings concerns are being selectively bought as overall thematic volume expands. While entering at the initial move is challenging, the ideal strategy is to stay half a step ahead of the market on stocks starting to trend.

Among low- to mid-priced semiconductor-related stocks, Daito Chemix Corporation <4366> is showing signs of renewed activity. The photoresist maker has a track record of producing both its own brand and manufacturing on an OEM basis for global players, including TOKYO OHKA KOGYO CO., LTD. <4186>. Also notable is MUROMACHI CHEMICALS INC. <4885>, which appears to be rebounding from a price floor despite thin trading volume. The company's high-purity ion exchange resins are essential for producing ultrapure water used in semiconductor manufacturing and for purifying chemical solutions, drawing attention to its technical capabilities in niche fields. A price-to-earnings (P/E) ratio of 8x suggests significant room for multiple expansion. With a normalized price level in the four-digit range, current levels appear to offer an excellent buying opportunity. SIGMA KOKI CO.,LTD. <7713>, which supplies embedded optical systems for semiconductor manufacturing equipment, is also worth watching. The company is a pioneer in quantum computing applications and is capturing opportunities with optical components like beam splitters.

Meanwhile, as semiconductor stocks paused, defense-related names including Mitsubishi Heavy Industries,Ltd. <7011>, Kawasaki Heavy Industries,Ltd. <7012>, and IHI Corporation <7013> pushed higher. All three had been in correction phases since March, but thematic buying appears to be reigniting. Among the trio, Mitsubishi Heavy Industries is the biggest laggard but projects double-digit growth in both ordinary and net profits for the fiscal year ending March 2027. Additionally, the defense trio has exposure to space development, fueling expectations for capital rotation. Other promising stocks include Nippon Avionics Co., Ltd. <6946>, which is starting to rebound, while IMV CORPORATION <7760> and HODEN SEIMITSU KAKO KENKYUSHO CO.,LTD. <6469> are also likely to see buying interest.

Economic data due tomorrow before the market open includes the April Corporate Services Price Index. Bank of Japan Governor Ueda will deliver remarks at an international conference. A 40-year Japanese government bond (JGB) auction is scheduled during morning trading hours. Additionally, April construction machinery shipments will be released in the afternoon. Overseas, focus will center on China's January-April industrial profits, Australia's April CPI, and the Reserve Bank of New Zealand's policy rate decision. In the U.S., several Federal Reserve officials are scheduled to speak, with Fed Governor Cook delivering a speech and Vice Chair Jefferson participating in a discussion. A five-year Treasury auction will be held, alongside high market interest in Salesforce February-April earnings. Markets in Singapore, Malaysia, and Indonesia will be closed for holidays.

Source: MINKABU PRESS

*Translated by generative AI. Click here for the original article.