The nation's main index fell for five consecutive days last week after China in a "white paper" threatened to use military force if Taiwan rebuffed its overtures for reunification.
After climbing 0.3 percent in the Feb. 14 to Feb. 19 period, the TAIEX finished Friday at 9,432.49, or 7.1 percent lower for the week and down 7.5 percent since reaching a closing high of 10,202.2 on Feb. 17.
The Over-the-Counter index fell a whopping 9.3 percent to 256.10 -- a fraction of a percentage point shy of a bona fide correction.
But the huge declines haven't been surprising to market watchers, who had been forecasting a downturn in the days leading up to the March 18 presidential election.
With the main index's 30-plus percent charge since mid-November, the market was due for a little profit-taking -- and cross-strait political tension surrounding the election was cited as the likely trigger.
"The correction will continue this week. People should avoid buying too quickly," said Grace Li, research manager at investment house MasterLink Securities (元富證券). "If you start buying now, the chances of making money is relatively small."
Two weeks ago, Li forecast that the TAIEX would hit 10,300, followed by a 1,000-point correction. The index briefly traded above that mark in intraday trade on Feb. 18, and has since shed roughly 900 points.
According to Li, the TAIEX has simply gotten ahead of itself, as the nation's industrial growth hasn't kept up with the market's recent bullishness.
Her model indicates that 8,900 is an appropriate level, give or take 500 points on either side. "The market needs a correction to match the pace of industrial growth," she said.
Still, industrial growth for the year is strong, with the GDP expected to expand by 6.5 percent. Therefore, some analysts' calls for the TAIEX to reach 12,000 this year aren't too far off, Li said.
"In general, we support this kind of long-term view. There is an upward trend for long-term economic growth," she said, adding that her own projection was a TAIEX high of between 11,500 and 12,500 for the year.
Stocks could even climb to a high of 13,000, she said, as the technology sector -- through its growing weight in the TAIEX's composition -- increasingly becomes more influential on the index's movement.
Naiwen Kerr, assistant vice president of Taiwan International Securities (
When the TAIEX on Friday fell below the 9,500 mark, which was seen by many as a key support level, "That caused some investors to reduce their positions even more," Kerr said.
There was also anxiety last week over record levels of margin buying.
Roughly NT$560 billion has been borrowed to invest in equities, and many individual stocks have approached government caps that limit how many shares may be purchased on credit.
"In the past few days the selling was concentrated in shares with high margin levels," Kerr said.
For the week ahead, both Kerr and Li see stocks possibly trading lower.
Li expects the main index to trade between 9,200 and 9,800, with "9,200 to 9,300 a very important support level, although there's a good chance we may lose this support."
Kerr said stocks could test 8,800 or 9,000 and, like Li, warned investors against starting their bargain shopping too early. "People will still be looking for the chance to sell into a rebound," he said.
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