Japan 225 IndexShort
Gone Too Far…
As the world remains engrossed in the unfolding drama of the debt ceiling, we believe another event of significance deserves our attention.
Let's take a brief detour into the annals of economic history, looking at the era of Abenomics. This term refers to the monetary policy instituted during Shinzo Abe's second term as Prime Minister of Japan. Abenomics rested on the foundation of "Three Arrows" - aggressive monetary policy, fiscal consolidation, and a robust growth strategy.
The outcome? The Nikkei embarked on an impressive bull run, seemingly unstoppable in its upward trajectory.
This performance becomes all the more remarkable when compared to the S&P500, which managed a modest gain of only 12% over the same period. This comparison sparked an intriguing question: How do these two indices compare now, especially with the Nikkei shattering two-decade highs?
When we chart the spread, the ratio of Nikkei 225 to S&P 500 stands on the brink of upper resistance, a boundary that has proven significant for nearly a decade. A more granular exploration of each index reveals some compelling details.
For the S&P 500, we observe a break of the upper resistance as well as a break from an ascending triangle, both of which signify a bullish continuation. While RSI has not yet reached the overbought territory.
On the other hand, the recent surge in the Nikkei 225 index has been robust and swift, surpassing the 2021 highs, with the RSI indicating an extreme overbought scenario.
Thus, we suspect that the Nikkei's meteoric ascent may have overshot its mark. This situation presents an intriguing trading opportunity: shorting the Nikkei 225 / S&P 500 spread. This can be executed by shorting the Nikkei 225 Futures and going long on the S&P 500 Futures. To match the Nikkei 225 USD contract size at the current price of 31,300 with a contract value of 31,300 x 5 = 156,500 USD, we could utilize the Micro E-Mini S&P 500 Index Futures at the current price of 4,215 with a contract value of 4,125 x 5 = 21,075 USD. Hence, to balance the position size, we could employ 1 Nikkei 225 contract and 7 Micro S&P 500 contracts. The Nikkei 225 USD Futures represents 5 USD x Nikkei Stock Average. Prices are quoted in US dollars and cents per index point, each 5 point move is equal to 25 USD. The Micro E-Mini S&P 500 Futures represents 5 USD x S&P 500 index. Prices are quoted in US dollars and cents per index point, each 0.25 index point move is equal to 1.25 USD.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
adb.org/publications/three-arrows-abenomics-and-structural-reform-japan-inflation-targeting-policy-central
cmegroup.com/markets/equities/international-indices/nikkei-225-dollar.contractSpecs.html
cmegroup.com/markets/equities/sp/e-mini-sandp500.contractSpecs.html
Let's take a brief detour into the annals of economic history, looking at the era of Abenomics. This term refers to the monetary policy instituted during Shinzo Abe's second term as Prime Minister of Japan. Abenomics rested on the foundation of "Three Arrows" - aggressive monetary policy, fiscal consolidation, and a robust growth strategy.
The outcome? The Nikkei embarked on an impressive bull run, seemingly unstoppable in its upward trajectory.
This performance becomes all the more remarkable when compared to the S&P500, which managed a modest gain of only 12% over the same period. This comparison sparked an intriguing question: How do these two indices compare now, especially with the Nikkei shattering two-decade highs?
When we chart the spread, the ratio of Nikkei 225 to S&P 500 stands on the brink of upper resistance, a boundary that has proven significant for nearly a decade. A more granular exploration of each index reveals some compelling details.
For the S&P 500, we observe a break of the upper resistance as well as a break from an ascending triangle, both of which signify a bullish continuation. While RSI has not yet reached the overbought territory.
On the other hand, the recent surge in the Nikkei 225 index has been robust and swift, surpassing the 2021 highs, with the RSI indicating an extreme overbought scenario.
Thus, we suspect that the Nikkei's meteoric ascent may have overshot its mark. This situation presents an intriguing trading opportunity: shorting the Nikkei 225 / S&P 500 spread. This can be executed by shorting the Nikkei 225 Futures and going long on the S&P 500 Futures. To match the Nikkei 225 USD contract size at the current price of 31,300 with a contract value of 31,300 x 5 = 156,500 USD, we could utilize the Micro E-Mini S&P 500 Index Futures at the current price of 4,215 with a contract value of 4,125 x 5 = 21,075 USD. Hence, to balance the position size, we could employ 1 Nikkei 225 contract and 7 Micro S&P 500 contracts. The Nikkei 225 USD Futures represents 5 USD x Nikkei Stock Average. Prices are quoted in US dollars and cents per index point, each 5 point move is equal to 25 USD. The Micro E-Mini S&P 500 Futures represents 5 USD x S&P 500 index. Prices are quoted in US dollars and cents per index point, each 0.25 index point move is equal to 1.25 USD.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
adb.org/publications/three-arrows-abenomics-and-structural-reform-japan-inflation-targeting-policy-central
cmegroup.com/markets/equities/international-indices/nikkei-225-dollar.contractSpecs.html
cmegroup.com/markets/equities/sp/e-mini-sandp500.contractSpecs.html
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