This could derail the markets’ rally

Of the many jobs America has outsourced to Asia, add to the list the job of worrying about whether the Fed will taper quantitative easing early.

Sure, US stocks yesterday had their biggest drop this summer. And, they're down another fraction of one percent today.

But that's nothing compared to how much Japan is worrying for us. The Nikkei 225 Index – the benchmark for Japan's stock market – dropped a whopping 4% last night. To put that in perspective, it's as if the Dow fell 618 points or the S&P dropped 67.50 points.

(Read: Nikkei closes down 4% as yen rises on Fed uncertainty)

So, what got Japan nervous? It was comments made yesterday by two Federal Reserve Bank presidents about how soon the Fed will reduce its $85 billion per month bond-buying operation. The policy, known as quantitative easing (QE), has pumped dollars into the financial system by buying US Treasury and mortgage bonds, thus simultaneously helping to lower interest rates.

Chicago Fed chief Charles Evans said to reporters yesterday, "We are quite likely to reduce the flow of purchases rate starting later this year" though he didn't give an exact date. Meanwhile, Atlanta's Fed president Dennis Lockhart said in an interview with Market News International that we could see tapering "as early as September", though it would depend on economic data. That Evans and Lockhart are two of the more "dovish" Fed presidents made these comments particularly noteworthy.

(Read: An outdated monetary policy model stirs fears of Fed policy)

This led to a strengthening of the yen as Japanese investors began to sell their foreign currencies to hedge against a possible downturn. The stronger yen, in turn, hit Japanese stocks because it could make exporting a lot harder.

So, should American investors take a cue from Japan and start unloading stocks based on taper talk? Steve Cortes, founder of Veracruz TJM, says the Japanese yen's strength is an indicator to where the US markets may be headed next. In the video above, he shows how the two are related.

On the technicals, Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, shows the charts on where he thinks the US markets are headed next.

To see Cortes and Ross analyze the US markets given Japan and taper talk, watch the video above.

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