Japan In “Bear Market”, Will Global Equities Follow?

``The ultimate driver of Japan’s adaptation today is globalization. In short, the world changed while Japan slept, as more and more developing countries became participants in the world’s economy and the old patterns of trade and capital flow went by the wayside. Now, as Japan reawakens, its challenge is to find a place in this different world, starting with its own backyard: Asia.”-Matthews Asian Fund

Figure 2: Stockcharts.com: Are Global Markets Headed Lower?

Major equity markets continues to be in a funk with Japan’s 39-year old broadest benchmark, the Topix, technically entering into a “bear market” when it declined below the yardstick of 20% from its 2007 peak last week. The Topix is down by over 21% as of Friday’s close. (Thursday to be exact-Friday was Labor Thanksgiving “kinro kansha no hi” holiday)

Another major Japanese equity bellwether, the Nikkei 225, a price weighted index of Japan’s top 225 blue chip stocks, as shown in the main window of Figure 2 courtesy of stockcharts.com, has been down by nearly 19% and is clearly approaching its pivotal support level at 14,000.

Meanwhile, Europe’s Dow Jones Stoxx 50 or (stoxx.com) a ``leading Blue-chip index for the Eurozone, provides a Blue-chip representation of supersector leaders in the Eurozone. The index covers 50 stocks from 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain” have lost about 9.5% from its peak (shown in the upper pane below main window) and like the Nikkei 225 seems to be testing its critical support level at around 3,500.

The broad based S & P 500 (pane above main window), a major US bellwether, is down by about 8.6% from its peak, relieved from its recent lows by a stern rally last Friday, but on lean volume, on an abbreviated trading day following the Thanksgiving Holiday. Incidentally, the Dow Jones Industrials has touched the 10% loss trigger point which should activate the next phase of the “Bernanke Put” this December 11^th.

Like the Nikkei and the Dow Stoxx 50, the S & P 500 is nearly at the cusp of the crucial threshold level at 1,400.

On the other hand, the Dow Jones Asia Pacific ex-Japan stocks (lowest pane) surrendered about 14% of its gains from the recent highs and appear to be in a pronounced decline reflecting the same activities in the major markets.

From Bloomberg (emphasis ours), ``Global stock markets have lost $2.9 trillion since Oct. 31 and the collapse of the subprime market in the U.S. has triggered about $50 billion in writedowns among the world's largest banks.”

So, in a break from last week’s seeming indecision, global markets appear to be signaling in unison a forthcoming test of the respective critical support levels, which may determine the direction and returns for 2008.

With the recent performances of the US treasury markets indicative of an approaching US economic recession, plus Japan’s likely transition towards an interim bear market, the likelihood is that once these levels have been cleared, a “bear market” could be the hallmark of global equities in 2008, unless of course we see an elaborate turnaround soon.