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This could signal the next leg down for stocks

Todd Gordon of TradingAnalysis.com discusses how Japan is affecting US markets and what emerging markets turmoil means for US stocks, bonds, and gold.

Things are precarious in Japan, and that could mean trouble for US markets.

Once the hottest trade on Earth, the Nikkei is off by 7% this year, compared to the 3% decline in the S&P 500. The culprit is a rising yen, as investors have shunned risk and flocked to safe haven currencies.

Over the past several months, the Japanese government under the leadership of Prime Minister Shinzo Abe has been trying to weaken the yen in an effort to boost its economy. Japan's version of quantitative easing is roughly the same size as America's but, given that Japan's economy is one-third the size of the US, it's had a bigger impact.

(Read: Golden buying opportunity for Japan stocks may be near)

That helped the yen dropped 17% in value in 2013, which in turn was a big factor in the Nikkei's performance. While Americans celebrated a 29% gain for the benchmark S&P 500 index in last year, Japan's market index, the Nikkei 225 index soared nearly 57%.

So how concerned should investors be about the decline in the Japanese stock market?

Todd Gordon, founder of TradingAnalysis.com, says American investors should be closely paying attention to what's happening in Japan.

"We're starting to see some warning signs from eastern markets," says Gordon. "Shinzo Abe [is] being voted against by the markets. The Nikkei's down [and] the yen is strengthening. I think he's going to have a hard time to reflate the economy like his mission has been. That's being exported back to the western markets."

(Read: Are emerging markets on the brink of another crisis?)

Gordon believes the turmoil in emerging markets will mean the Federal Reserve Bank and the Bank of Japan will have to continue their easy money policy longer than expected.

 

So, how should traders play bonds, stocks, and gold? Watch the video above to hear where Gordon says investors should put their money right now.

More from Talking Numbers:

Here’s why emerging markets are threatening the US
This chart says Icahn is wrong about Apple
One portfolio manager was long gold for six years. Then THIS happened

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