Long Term View of the Nikkei Crash Which is Still Crashing

Jun 4, 2009: 12:36 PM CST

A reader asked me to take a longer look at the Nikkei Index, which stemmed from my prior post “NASDAQ and Nikkei – Is History Being Remade?” The following post is an added to show that longer term perspective which shows a massive rise followed by a massive decline – perhaps more shocking than many people expected with the index roaring at all time highs just over 20 years ago.

Let’s see the multi-year chart of Japan’s Nikkei Index:

I’m still surprised when I take a look at this chart.  It looks similar to the US NASDAQ Index, only the correction has taken a much longer period of time and there is no hope of returning to the 38,000 peak any time soon – it may take years or even decades to do so again.

The main lesson to learn is that “irrational exuberance” does not pay – meaning, when something looks to good to be true (as in, a market looks like it can never go down), it’s often the end of the ride.

Price can rise faster and higher than almost anyone expects it to – I’m sure there were plenty of Nikkei Bears as price skyrocketed to new highs in the late 1980s who were ultimately right, but early as price overshot their targets to the upside.

Price then turned around and began to overshoot all targets to the downsde, reaching almost a 30 year low in late 2008 and early 2009.

Another lesson is that price can travel further to the downside than most people – even the most hardened of bears – expect.

I still think it’s optimal to take a “next swing” approach to trading a market or index – have the larger structure in mind but always be looking for what the next likely “swing” or immediate move will be.  That’s ultimately where you will make the most profit with the greatest risk control.

Corey Rosenbloom, CMT
Afraid to Trade.com

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5 Comments

5 Responses to “Long Term View of the Nikkei Crash Which is Still Crashing”

  1. Chris Says:

    Great article.

    I was only a kid when it happened but I remember the grown ups of the time talking about how Tokyo was worth more than the US based on the down town real estate price per square foot Tokyo buyers were paying at the peak of the market….and of how Japan was going to overtake the US in GDP. It sounds silly now but these were real fears that every day middle class Americans were mulling over. This is a boom I struggle to explain…..it eclipses the dot com in its irrationality and I wonder if it has to do with the preponsity of the Japenese to invest only in their own market. Then, significantly cut off from extenal 'rational' forces of foreign investers the hysteria can take off….with the staggering results we see in the 30 year chart of the Kikkei above. However getting back to the here and now I think what we have experienced recently is more akin to irrational pessimism with sellers not appricating the true risk reward ratio to the downside. I don't know why so many traders fail to see, or are at least slow to see, the staggering amount of demand that is being generated in the global economy. For me the limiting factor is energy, other natural resources and nothing else which is why I am so pessimistic on gold and bullish on the economic prospects generally and providers of energy (in whatever economical form) in particular.

    Thanks for lengething the timescales in this post because it really helps to get a handle on 'true value' as well as enabling traders to focus on the next likely swing in their here and now timeframe, which, as you say optimises profits.

  2. blues Says:

    Well, nice chart compare to what's about to happen to US of A… That would be like a walk in the park. Sh**, at least Japanese had some saving, what does American got? debt, Debt, DEbt, DEBT and DDDEEEBBBTT! Gee… And worst of all, like I said before, America is going to get it in both holes this time! TNX is about to break out, YET AGAIN (look like a pennant on daily chart which today is already threaten to break out to the upside). And gold is about to, yet again, to try to break above $1000. USD is going down like a stone into the sea and soon to be worth less then a toilet paper… Gee, and what does market do? RALLY! I guess happy days are here again where we'll be living in high interest rate plus high inflation! Whoopppyy!

  3. Vol Says:

    Hey corey,

    Thanks for pointing this out. (I was the one that asked for your take on this in a prior post)
    The reason I love the Nikkei chart is that it shows what 99.9999% of investors would never anticipate happening to a stock index. A typical investment prospectus shows you a straight line from the bottom-left to top-right. Show the Nikkei chart to 401k investors and lets see what happens to investor mentality.

    Remember folks, you have only made a profit/loss when you have sold your position. Until you liquidate your positions, you just own a piece of paper. Unfortunately, most investments are just a piece of paper.

  4. No_More_Bubbles Says:

    Nice chart, but what do you mean it may take years or decades for the Nikkei to return to 38K.

    HUH?

    IT WILL NEVER BE THERE AGAIN!

    NEVER!

  5. No_More_Bubbles Says:

    Nice chart, but what do you mean it may take years or decades for the Nikkei to return to 38K.

    HUH?

    IT WILL NEVER BE THERE AGAIN!

    NEVER!