Will the Bear Market In Japan Continue?

Stocks began February on a roller coaster ride, with Asian bourses declining again.  The Nikkei notched up solid losses declining more than 2% and slipping 10% from its recent highs putting the benchmark index into correction territory.  Investor’s sentiment continues to be bearish, as economic data released in the region continues to reflect declining investor sentiment.  Weak data and continued volatility could push the Nikkei into bear market territory which is usually defined as a 20% decline from a recent peak.

On Friday, Japan released soft retail data, which helped increase market volatility. Japanese December retail sales were weaker than expected, posting a 1.1% fall month over month after a 2.0% rise in November.  The consensus had called for a 0.3% increase, which shows consumer trepidation ahead of the retail sales tax hike on April 1, 2014. Inflows into Japan for stocks are beginning to subside.  The MOF weekly portfolio data was released and shows that foreign appetite for Japanese stocks is waning.  The 2.45% decline in the Nikkei Thursday and the 0.6% decline Friday bring the year-over-year decline to 8.5%.  Monday’s decline of 2% notched up a 10.5% decline for the year. Foreign investors sold Japanese stocks last week and appear set to have been net sellers for the month, the first such month since last August. 

In China, the official number did not show a decline into contraction territory as was the case with the HSBC unofficial number which was released last week. China's official manufacturing PMI fell to a six-month low of 50.5 in January from 51 in December, while the non-manufacturing print slipped to the lowest level since December 2008, falling to 53.4 from 54.6. The readings add to other data that indicate slowing growth in China, although at least the latest manufacturing figure shows expansion.

The DXJ Wisdom Tress unhedged Nikkei Index ETF broke through support levels and is point to test the lows made in November near $45.  Momentum is negative with the MACD (moving average convergence divergence) index printing at its lowest levels since October.  The relative strength index (RSI) moved lower with price action reflecting accelerating negative momentum and printing near 34, which is on the lower end of the neutral range.