Beware of Catching a Falling Knife in Asian Markets

by: Prieur du Plessis

As stock markets correct, the valuation of Asian equities has been driven down to historically attractive levels, with the price/earnings ratio (based on profit in the next 12 months) falling below the 15-year average by one standard deviation. “History suggests that oversold situations like this usually harbinger positive market returns in the next 12 months,” said US Global Investors – Weekly Investor Alert.

Source: US Global Investors – Weekly Investor Alert, May 28, 2010.

But it is unsure whether the fall in stock prices has run its course and one should be careful not to catch a falling knife. Eoin Treacy (Fullermoney) summarized the situation as follows: “Stock market investors are not out of the woods just yet. Technical damage has been done and the consistency of medium-term uptrends has deteriorated. This means that at the very least they will have to hold last week’s lows and rally further, sustaining moves back above their 200-day moving averages if a further test of underlying trading is to be avoided.” Caution remains.