The Nikkei sold off 9.38% last night, closing at 9,203. Coming after a long and steady decline (from 18,250 in June ’07), such a dramatic move to deeply oversold conditions reflects capitulation — the market just throws in the towel. Afterward, who is left to convert to a bear? Bullish sentiment readings in Tokyo must have dipped well into the single digits.

5-day view here:

Source: Yahoo! Finance. Click image for larger view.

Now, I am not calling a final bottom in Japan, since yields are still low and this global depression has a lot further to run, but this may be a major stage bottom. Rallies from such intermediate lows can be extremely powerful, as the fear of losses subsides and gives way to the fear of missing out on gains.

The world markets have been moving together through this bear market, so a capitulation in one major index suggests that relief may be near for the rest, although they may have to make their own dramatic plunges first. Here is a 2-year view of the Nikkei (blue), Europe (VEURX, green) and the S&P 500 (red). Note that the chart does not reflect last night’s dive in the Nikkei.

Source: Yahoo! Finance. Click image for larger view.

Now, once this bottom is in, the rally should only be of interest to traders, not long-term investors, because once it peters out we are going plunge all over again. Anyone who needs these funds for retirement or their kids’ tuition or who is not a proven trader should get out and stay out. Don’t even look at the market news for the next two years, because you will be tempted to jump back in at just the wrong time.

Can’t make your retirement plans work without 8% compounded returns? Well, better scale down on those plans and increase your savings, because this bear is here to stay. The whole concept of putting the bulk of your life savings in the stock market is one of the biggest scams of all. Stocks are a horrible way to save. They are good for investing when they are cheap, and good for speculating if you are a pro, but as a savings instrument they are terrible. What kind of a savings instrument routinely loses 50-90% of its value?

The pervasiveness of the belief that one should save in stocks is a product of a bull market. People had different opinions in the ’30s, ’40s and ’70s. Before long, newspaper columnists will again promote Treasury bonds for saving, and at that point you might want to look the other way and consider that stocks could be cheap.

I would like to be a stock bull again — it is more fun. But I am going to wait until things are really cheap and paying nice dividends. Even after 30% and 50% plunges, respectively, US and Japanese stocks are still only yielding about 2%. Furthermore, dividends are being slashed left and right, so the expected yield is even lower. I want to see at least 8% yields before I buy stocks and put them away.

In 1932, the yield on the Dow briefly hit 15%. That speaks as much to the strength of American industry at the time as it does to the depth of the crash. I would be surprised if US companies hold up as well this time.