Is the Asian market correction turning into a bear market?

Local technical analyst guru, Goola Warden has declared that the Straits Times Index is poised for a break below the neckline of a monstrous top formation. If this happens, it will begin a downtrend that can remain so for weeks, months, and sometimes years. Definitely not a good time to be a long investor, if I believe in Goola. How accurate is Goola? I remember reading an article of her predicting the further decline of Capitaland back in late 2008. Weeks later, the counter surged, proving that one should buy, not sell when the "sell" call was made. See, the technicals must be accompanied by the analysis.

So why are Asian markets selling like crazy, STI included? Because markets generally believe that the PBOC has been behind the curve in fighting inflation, and has been too timid in their rate hikes, according to Phillip Securities. However, Chinese stocks in particular have already priced in this economic hard landing weeks ago
as valuations are hovering near trough (remember, I wrote that the Shanghai Index is nearing the end of its correction. Now, I really think its correction has ended). Thus I think market has got this wrong once again, just like it did in 3Q10. This is good news, as "it could lead to another explosive rally, especially if inflation starts to tame post CNY like we think it will", so says Phillip. The call to action is however only for investors with a clear and long horizon, with a strong mindset to buy when others are fearful as valuations are at giveaway.

But why is Asia so weak, when US stock markets are doing so well? Because US is taking off from a soft mid-2010 patch, while Asian equities, having had a solid run are now facing its first headwinds - inflation. Whilst inflation is a key risk to Asian stocks, some countries (Indonesia, China, Philippines) are perceived to be behind the curve on raising interest rates. This has not been the general case. Most Asian central banks have done quite a few rounds already. India and Indonesia have joined in with the rate hikes.

As such, if you believe central banks are not too far behind the curve, and that high growth Asian economies have some fat in them to withstand front-loading of rate-hikes, there will be no hard landing, and then the money will come back to Asian markets once US stocks have exhausted their run.

I believe the money will come back to Asia, directly defying Goola's technical view that asian stock markets are heading for a bear market. It is still too early to go into bear mode, and lower prices should provide me with an opportuntiy to reenter the market. Like Phillip, I expect the STI to head back higher.