The Nikkei's Ominous Meltdown

NEW YORK (TheStreet) -- Japan's Nikkei (NKY) stock index has seen its price action break down over the past few weeks, leading many to question if global equities have reached a top.

The Nikkei index tumbled on early trade Friday, weakened by Wall Street's large decline the day before. Within the first 20 minutes of the Tokyo Stock Exchange opening, the index quickly declined 2.8%. Although major equity indexes across the world have begun to pull back, few have fallen as far as Japan's stock market.

The infamous death cross, a technical term used when a stock or index's 50-day moving average crosses below its 200-day moving average, looks to be in sight for the Nikkei. A death cross signals that there has been a change in the asset's trend. In this case, Japanese equities could trend lower for the next few months to a year if the cross takes place. The index has not experienced a death cross since summer of 2012, when tensions surrounding the U.S. debt ceiling were high.

This time around, equity market fatigue and declining momentum stocks have led investors to bid CurrencyShares Japanese Yen Trust (FXY) higher. Japan relies heavily on its export industry, and when the value of its currency significantly increases it hurts demand for domestic equities. The yen has traded at suppressed levels over the past year as the country's central bank put into place an unprecedented stimulus program to promote economic growth.

Although the yen has been artificially weakened, recent investor anxiety at home and abroad has led investors to push funds into the traditionally safe Japanese currency.

Momentum stocks such as Facebook (FB) and Netflix (NFLX) have sold off considerably the past few months. This is troubling to investors because high-flying momentum stocks were the biggest beneficiaries of the Federal Reserve's easy money policy, and strong demand for such stocks kept markets moving higher.

Anxiety over weakening equity sectors, as well as lingering geopolitical risks, like the continuing conflict between Russia and Ukraine, have investors preparing for future negative events.

While few indices have declined as much as the Nikkei to date, developments in various global assets such as the iShares Barclays 20+ Year Treasury Bond (TLT) could also be indicating a downturn in equity markets worldwide.

The Fed decided to cut stimulus, and thus tighten monetary policy throughout 2014, but investors have continued to bid treasury bonds higher as a sort of fear trade. It's similar to what is happening in Japan. If investors are anxious about potential equity declines, they will move funds into any asset to manage risk, even if that asset is being manipulated by the country's central bank.

Ultimately, it is not a positive sign that the Nikkei continues to weaken. But it also does not guarantee that the bull market in global equities is over. The Nikkei is approaching important support levels at 14,000, and if it can avoid the death cross, investors will feel a renewed sense of confidence.

^N225 Chart

^N225 data by YCharts

At the time of publication, the author had no position in any of the funds mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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