It has been a sizzling week for markets in Asia, with Australia, Hong Kong, Singapore and South Korea all closing at lifetime highs today. But what goes up must come down. In this week’s A Fund Affair, our guest writer, Mah Ching Cheng, Research Manager at Fundsupermart.com, takes a look at the signals that markets give off just before a downturn. Mah shares her opinion with us.
Barring a sharp but brief correction in late February this year, markets have been hitting all-time highs. When markets hit record levels, investors become concerned that a sharp downturn may follow. It is hard to predict when markets will reach their peak or undergo a correction. But according to our studies, there are certain indicators, which can give hints on whether a particular market is due for correction.
We have closely examined various bull and bear runs over a 36-year period (up to mid-2006). We studied 29 scenarios that fulfilled our criteria for a bull run, and 32 scenarios that qualified for a bear run.
Our criteria for a bull run:
- A market must double after more than one calendar year;
- A market must post an annualised return of more than 15% per year during the period of the bull-run; and
- There must be no negative returns during the period under study.
Based on these criteria, the Asia ex-Japan region was in a bull run before the correction began in late February of this year. Table 1 shows the performances of various Asian markets since the upturn began in 2003. Other than Malaysia, Taiwan and Thailand, markets had more than a 60% return from 2004 to 2006.