Focus on AI and semiconductor stocks' resilience ahead of tomorrow's trading session

The Tokyo stock market declined on June 2, with the Nikkei Stock Average falling 200 yen from the previous session to 66,734 yen, marking its first drop in two days. Trading reversed the previous day's gains; although Nikkei 225 futures trended stronger before the opening bell, the cash index moved in the opposite direction from the start. Post-opening, heavy selling by foreign investors in the futures market sent the Nikkei into a free fall. The index plummeted 1,100 yen by the morning close and extended losses to nearly 1,400 yen early in the afternoon. However, the market staged a straight recovery once AI algorithmic short-covering was triggered. Amid a sharp decline in long-term interest rates, some observers suggested the Bank of Japan might postpone its widely expected interest rate hike.

In the previous session, the Nikkei average climbed to the 67,000 yen level for the first time intraday, hitting a record high despite closing in the 66,900 yen range. Even with potential bubble elements, the current momentum in AI and semiconductor shares remains a reality. Proponents argue valuations are genuine and not inflated relative to earnings metrics like price-to-earnings (P/E) ratios. However, market bifurcation warrants caution. While the Nikkei average soared to uncharted territory in the prior session, roughly 220 Prime Market stocks hit new lows ? the highest this year ? underlining a deeply fragmented market beneath the surface. Although the Nikkei rebounded rapidly in Tuesday's afternoon session, the number of stocks hitting new lows surged further to around 360. "Investors concentrating on AI and semiconductor stocks are winning, but they represent a clear minority among retail investors," said a mid-tier securities strategist. Half-hearted value rotations into domestic demand or auto stocks are almost certain to incur capital losses in this environment.

While Elon Musk’s SpaceX is expected to go public soon, Anthropic recently filed for an IPO, raising the possibility that it may list ahead of OpenAI. Even if OpenAI’s listing takes a back seat, any time lag should be minimal. "An OpenAI listing after Anthropic could work in its favor by using Anthropic as a benchmark," an online securities analyst noted. With IPOs for the AI big three approaching amid heavy fanfare, the AI and semiconductor sectors in Japan and the U.S. are unlikely to shrink beforehand. Any full-scale correction in AI-related stocks would likely occur after these listings.

This column previously noted that buying on dips, rather than chasing highs, is the preferred strategy for core AI and semiconductor plays, securing returns with lower timing risks regardless of price levels. This includes buying during downward phases like Tuesday morning. As long as the broader upward trend remains intact, rebound phases are highly likely to reward investors. While deeply corrected stocks offer substantial recovery room, targeting strong stocks whose upward trends remain unbroken is fundamentally more advantageous.

Fujikura Ltd. <5803> will take time to repair its technical damage. In contrast, ADVANTEST CORPORATION <6857>, supported by its 75-day moving average, and Tokyo Electron Limited <8035>, which remains above its 25-day line, show higher resilience. Currently, Kioxia Holdings <285A> appears the strongest, holding firm even above its 5-day line. The stock single-handedly generated a record turnover in the 3.20 trillion yen range on Tuesday, signaling it has joined the ranks of U.S. big tech on a borderless stage rather than just within Tokyo. While its price level remains high for retail investors, such stocks drawing foreign capital are prime targets for buying on dips. Barring stock-specific negative news, the basic principle favors strong stocks with fewer trapped holders at higher levels.

Meanwhile, growth stocks face a challenging environment. Small-cap shares are in a time frame where bottom-up investment flows remain thin. However, some small-cap issues are quietly attracting pinpoint capital. Embedded software specialist eSOL Co.,Ltd. <4420> and mold specialist PUNCH INDUSTRY CO.,LTD. <6165> are navigating their own paths, forming a unique niche.

Looking ahead to Wednesday, the BOJ will release its projected changes in current account balances for June before the opening bell, and Governor Kazuo Ueda is scheduled to speak at a Kyodo News event, with markets focusing on his remarks. Overseas, China will release its May non-manufacturing Purchasing Managers' Index (PMI). In the U.S., market interest centers on the May ADP National Employment Report, the May Institute for Supply Management (ISM) non-manufacturing index, April manufacturing orders, and the Federal Reserve's Beige Book. Broadcom and CrowdStrike Holdings are set to report earnings. South Korean and Thai markets will be closed.

Source: MINKABU PRESS

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