The Nikkei 225's Recovery Still Lags as S&P 500's Bubble Inflates - TheStreet

NEW YORK (TheStreet) -- The news of the day includes a rate cut by the People's Bank of China and a commitment by the European Central Bank to expand its asset purchase programs. Earlier in the week the Bank of Japan announced increased quantitative easing measures.

The result is new stock market highs. But the performance of the Nikkei 225 over the last 25 years suggests money printing creates bubbles that eventually break, which is why 10-year bond yields stay low in Japan and the U.S.

Let's begin by comparing the performance of the Nikkei 225 to the S&P 500 since March 2009.

The Nikkei 225 rebounded 150% from its March 2009 low of 7022 to its Nov. 14 high at 17520, while the S&P 500 surged 210% from 666.80 in March 2009 to an all-time intraday high at 2071.46 as of noon on Nov. 21.

The long-term graph of the Nikkei 225 should be viewed as a warning that money-printing does not work and that asset bubbles always pop.

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Courtesy of MetaStock Xenith

The above graph shows monthly bars for the Nikkei 225 (17357) going back to 1980. From 6850 in October 1982 the Nikkei 225 surged 469% to the all-time intraday high at 38957.14 set on Dec. 29, 1989. When this year ends it will be the 25th anniversary of this bubble peak. The post-bubble low was 6995.90 set in October 2008 so the top to bottom decline was 82%.

The green line is the 120-month simple moving average which is now a key level to hold at 12473.

Note that the Nikkei has had four major rebounds over the last 25 years but to lower highs; in June 1996, March 2000 (when the Nasdaq bubble popped), in Feb. to July 2007 (as the U.S. averages began to peak before the Crash of 2008) and the current rally.

The horizontal blue lines are the Fibonacci Retracements. As long as the U.S. averages continue to set new highs the Nikkei 225 should trade between its 23.6% Fibonacci Retracement at 14529 and its 38.2% retracement at 19,195.

As a comparison, let's look at the monthly chart for the S&P 500.

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Courtesy of MetaStock Xenith

The monthly chart for the S&P 500 shows the ups and downs since 1980. Look at the blip just before the year 1988. That's the "Crash of 1987," which looks so small compared to the ups and downs since then. The first major decline is from the March 2000 high to the July-October lows in 2002. Then there's the "Crash of 2008" to the March 2009 low at 666.80. The rally since then is an inflating bubble but predicting when and from what level it will pop cannot yet be determined.

Another comparison to look at is between the Japanese 10-year note yield and the yield on the U.S. Treasury 10-year note. This will show the consequence of what can happen if the U.S. stock bubble pops.

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As the Nikkei 225 began its historic plunge the yield on the JGB 10-Year yield traded up to 8% as the 1990s began. This yield steadily declined as the Nikkei declined and this yield has been below 2% since the twenty-first century began. Despite the recent rally for the Nikkei this yield is currently trading at 0.45%.

Let's look at the monthly chart for the U.S. Treasury 10-Year yield.

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Courtesy of MetaStock Xenith

The yield on the U.S. Treasury Note has been declining since the early-1980's from above 15%. In mid-1985 this yield declined below its 120-month simple moving average then at 10.5% and this important trend has been tested four times; Dec. 1994 at 8%, Jan. 200 at 6.6%, and April 2006 at 5.1% and June 2007 at 4.9%.

The all-time intraday low yield is 1.386% set on July 24, 2012 with the high end of the range since then was set at 3.041% on Jan. 2, 2014. This year's low yield has been 1.865% set on Oct. 15. There are no signs that this yield is ready to rise with its 120-month SMA now at 3.31%.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.