Japan’s Nikkei surges almost 8% higher on policy hopes

One of the largest stock markets in the world made one of its largest moves ever on the hope that the Bank of Japan will continue to inject liquidity in to equity and bond markets.

How are prices discovered now vs. then?

There is nothing normal about the price discovery mechanism in global stock markets these days.  Instead of economic activity, earnings and other catalysts the biggest driver of rallies and declines has been central bank chatter and policy.

This disruption to a fundamental component of the financial marketplace renders the ability to use current prices null and void.  Because if prices of assets are reacting more to central planning efforts and rumors than actual meaningful data on the ground, then they are not reflecting reality.  Traditionally price discovery helps market observers determine more information about economic and financial health.

Is this the growl of a new bear?

Bear market rallies tend to be some of the most fantastic moves one will ever see and Japan saw a similarly large rally in 2008 — followed by years of sideways trading until Abenomics came in to existence.

Japanese QE-to-infinity seems to have only two effects.  Reducing the purchasing power of the Yen and increasing the perceived value of Japanese stocks.  Economic activity in Japan continues to ebb lower and the threat of recession looms large.

Be careful and be nimble.

As a result, I remain highly skeptical that we are out of the woods or that this is the kind of activity a healthy bull market should see.

If anything this most recent rally may be faded (sold by traders) as a confirmation that it was merely a bear market pop.