Nikkei - Foreshadowing A Move In U.S. Markets?

Includes: EWJ, EZJ, NKY
by: Matthew Bradbard

The Nikkei has moved in one direction the last six months but like any party, they all come to a conclusion. To me, this is a classic case of why investors cannot fall asleep at the wheel and after significant gains, it generally always makes sense to book profits and manage your expectations, as markets do not move in one direction indefinitely.

I, for one, left the U.S. market way too early with clients, but I think we could have a similar correction domestically and I do not want to see investors act like a deer in headlights if we get a 10% washout in U.S. equity markets. Consider this a warning to trim positions and establish hedges so your portfolio remains intact on that type of decline.

As for the Nikkei, let's examine this move and where we are headed from here…

Click to enlarge

A 6.4% plunge in the Japanese stock market futures Thursday spilled into Europe, overshadowing moderately better economic data across the pond, dragging down bourses in Frankfurt, London, Paris and Milan. As of this post, U.S. markets are suggesting a 1% lower open.

After the turmoil in Japan overnight, investors are moving quickly out of riskier assets. The markets were manhandled by a confluence of events that interrupted a lengthy rally in risky assets. Thanks in large part to a flood of easy money from global central banks, investors have been blissfully purchasing stocks… particularly Japanese stocks. Before Thursday, the Nikkei had risen 50% in 2013 and 10% in less than two weeks.

Comments by Federal Reserve Chairman Ben Bernanke that the Fed might start pulling back on its bond purchases sometime this year made investors ponder that the flood might soon be tapering. That dovetailed with weak Chinese manufacturing data to send the Nikkei tumbling -- the worst decline by percentage since right after the March 2011 earthquake and tsunami.

The slope of the market, particularly since the beginning of May, rang alarm bells and candidly seemed to defy gravity. At a minimum, we should get a move back to the trend line (white line) that has supported the moves since it began in mid-November. From the highs, that would be an 18% decline, and then I would re-evaluate if there is more to follow.

Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.