Indicators Point to Another Down Leg in This 23-Year Bear Market

New York, Oct. 19, trading stocks .- Every once in a while, traders seem to forget that market prices move up and down and start expecting to see a move in one direction last forever. In the late  1980s, many traders assumed that the Japanese stock market was on a one-way trip up, and some believed there was no way to stop Japan's economy from growing. They were wrong, and a 23-year bear market has now led to the opposite feeling -- that Japan is in a never-ending decline.

Japanese stocks actually make fairly large moves up and down. The index is about 26% above its October 2008 lows, but has made six moves of 19% or more during that time. On average, the index delivers a tradable trend about every eight months.


Indicators, including recent news, show that the next trend in Japanese stocks is likely to be down and could be starting now. At the beginning of October, the Bank of Japan lowered its expectations for the economy and noted, "Japan's economic activity is leveling off more or less." This statement reinforced the opinion that the central bankers offered a month earlier that growth "has come to a pause."

Business leaders in Japan appear to agree with the central bank's assessment. International companies will invest where they can get the highest return on their investment and Japanese companies are increasingly turning overseas. According to Bloomberg, Japanese companies spent a record $88 billion on overseas acquisitions last year, and after Softbank's (OTC: SFTBY) recent $20 billion acquisition of Sprint Nextel (NYSE: S), analysts believe a new record might be set this year.

Softbank is a former Internet bubble stock that has survived and prospered in the downturn. Softbank is now Japan's third-largest wireless phone company and owns a number of websites. It is an Internet giant in Japan, and its stock has been among the leaders since the October 2008 bottom, gaining more than 420%.

From these news stories, we know that the Bank of Japan sees the economy slowing, and SFTBY and other Japanese companies with capital to invest are looking outside Japan. These are signals to traders that the Nikkei could be vulnerable to another decline and the charts show that a short trade could be profitable.
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