The Dow Jones Index (DJI) still appears to be in a downward trend rather than bullish reversal formation. Therefore, it is possible that the market might test its recent low as the last rebound lacked trading volume without the institutions buying. We believe a further sell-off is rather limited and the baseline is approximately 11,500 for the DJI.

Before the last market correction in 2002, the S&P500's price-to-earnings raito (PE) reached 60 in the fourth quarter of 2001 and the first quarter of 2002, which was expensive in terms of valuation. And when the market corrected, the PE fell more than 50 percent.

However, the current PE for S&P is approximately 18, which is no where near as overvalued as it was in 2001-02. Furthermore, even if the US does run into a recession this year, the last time the US hit a recession with such a low PE was in 1990-91, when the market only corrected 20 percent, and even then it rebounded quickly within a few months.

Having fallen already 15 percent from its peak, we believe the DJI risk remains fairly minimal.

Moreover, looking at a recent credit crisis, the Asian Financial Crisis, the market correction lasted for approximately 12 months from the peak to bottom, and it rebounded quickly as well. The subprime fallout technically started in July 2007 and the market correction began in October 2007. The market has already suffered at least a five-month loss.

But, unlike the Asian crisis, with speculators selling the local markets, this time we have the State Wealth Funds buying aggressively to support the US financial sectors, as well as central banks reacting responsively to the market conditions.

With a relatively low PE, a weak US dollar and nearly a 15 percent correction, the US market may find more support at the current level.

In view of this, Hong Kong is struggling to stay above the 250 days moving average, which suggests the overall market tone is still rather weak. Indeed, on Feb 15, the Hang Seng Index showed some strength for the first time this year, as the US market was trading weak the night before. And a lighter volume in the recent days showed that selling pressure was slowing.

But there is little sign of the stock market decoupling in Hong Kong.

The mainland's latest trade surplus reaffirmed our views on the global economy decoupling as global demand for mainland goods remains strong, even with higher export taxes (or import taxes in some foreign countries) and appreciating renminbi.

Although the trade surplus of $19.5 billion for January is below December's $22.7 billion, it still managed to climb 23 percent year-on-year, and exports rose 26.7 percent and imports rose 27.6 percent.

Many economists said the reason for the higher-than-expected surplus was the Chinese New Year, which may have helped boost the increase as exporters were shipping the goods earlier this year and distorted the figures. But Chinese New Year is no surprise to the market, and we believe the market has overstated the effects of the global or mainland slowdown by the US, which have been dragging the Hong Kong and mainland markets down in recent weeks.

However, the economic data for the next two to three months is going to be crucial. With the mainland snowstorms in February affecting the economy, the forecast for poor data is likely, and the Hong Kong and mainland markets are likely, to remain volatile unless the US recession is out of the way.

The author is a director of Convoy Asset Management Limited.

(HK Edition 02/26/2008 page3)