For the Bears: 1991 Nikkei Redux

The last great hope for the bears is that the US is actually just like Japan in the 1990s after that country's real estate bubble burst. The chart of the current NDX and the Nikkie in 1991 look very similar.

After a strong 23% rally off the bottom, the Nikkie looked like it would run higher after piercing the 200-day moving average. However, the breakout failed.

That breakout in the Nikkei turned instead into a head and shoulders top. The Nikkei subsequently retested the lows later that year.

Comments

[Graham and ...:]

A very good and clear historical analogy with our own time (and place).

Jun 03 09:45 AM

[SivBum:]

Such parallel has been told by many and these charts confirm their fear. However, unlike Nikki, S&P had its own lost decade before the great Oct 2007 to Mar 2009 crash.

Jun 03 10:57 AM

[Mad Hedge F...:]

You hit the nail right on the head. For me it’s déjà vu all over again. When I traded the Nikkei during the nineties, every market rally was capped by a predictable flood of new equity issuance by cash starved, undercapitalized Japanese banks. It sucked the life out of the market for a decade, confining it to a monotonous 14,000-20,000 range, until it finally dropped by half again after the dotcom bust. Sound familiar? This was while the Dow was going from 2,000 to 10,000. Now the tables are turned. Last month saw American banks soak the market with new equity on an unprecedented scale; Citibank (C) $58 billion, Bank of America (BAC) $25.9 billion, Morgan Stanley (MS) $6.8 billion, Goldman Sachs (GS) $5.8 billion, and JP Morgan (JPM) $5 billion. If the market edges higher, we will no doubt face more supply. I have no doubt that this will define the top end of a range in the Dow that we will have to live with for quite a long time. Volatilities will crash. Better to go trade China, Brazil, India, or any other country that has large cash surpluses and relatively healthy banks.

Jun 03 11:42 AM

[Macro_Man:]

Great charts. The economic situation in the US, while a lot better...is in someways similar to Japan. The economy is going to take a long time to get back to good, organic growth - not talking about short term highs provided by the government or the Fed. This bear market still has some years to run. 2011, 2014...who knows?

Can this rally go up another 10% or 15% - sure. Can we continue to have spectacular rallies...sure. they will infact be better than any drops in percentage terms.

However, nothing has changed...we are still setting lower highs and lower lows. Until that stops we are in a bear market.

Watch out for China and Financials to turn down in near term. They will turn down before the rest of the market does.

Jun 03 11:50 AM

[Fred Voetsch:]

On Jun 03 11:50 AM Macro_Man wrote:

> Great charts. The economic situation in the US, while a lot better...

Better? How? They had a nice steady economy through the 90's and beyond. Low unemployment, no bread lines.

Of course to this day their economy has yet to regain its vigor and that is what we seem to share. We too, I believe, have created a zombie economy.

Jun 03 04:35 PM