The recent wild volatility in the Hong Kong stock market (see the first chart below) reflects the current tug of war in investors' minds between greed and fear. The greed element is simple enough. Most of the valuation measures investors habitually look at are telling them that Hong Kong-listed stocks are trading at bargain basement prices and that the market is a screaming buy - probably the best buying opportunity of the decade. The fear factor is straightforward too. Investors are worried that the valuation measures they usually rely on simply don't work in exceptional times like these. The market might look cheap, but that doesn't necessarily rule out further abrupt falls in the near future. The most commonly used valuation measure, the price to earnings ratio, certainly makes Hong Kong stocks look attractively priced. At just 8.2, the price to historical earnings ratio is cheaper than at any time since the depths of the Asian crisis in 1998. Unfortunately, looking at past earnings is of limited use. Profits were generally strong last year, but with Hong Kong now in recession and the mainland's growth prospects deteriorating fast, last year's earnings performance is unlikely to be repeated any time soon. As a result, investors are preferring to look at the ratio of stock prices to forecasts of future earnings. On this basis also, Hong Kong equities look attractive. At 9.8 times estimated earnings for this year and 9.3 times for next, on the face of it the market seems to be compelling value. With signs emerging that the mass selling prompted by forced deleveraging that has battered stocks over the last couple of months may be drawing to a close, some investors have been emboldened to jump back into the market. But then the fear kicks in again. As each successive release of dismal economic data erodes sentiment a little further, investors begin to fret that analysts have misjudged the depth of the slump and that their earnings estimates for the next two years remain way too high. If earnings forecasts get revised down further, stocks would no longer look so cheap, and prices could adjust downward once again. Perhaps the stock market isn't such great value after all. Some other favoured valuation measures aren't much help either. For example, at 5.3 per cent, dividend yields on the Hang Seng Index have never been this high in traders' memory. But once again, dividend yields are a backward looking measure. If sliding earnings force companies to cut their dividend payments for next year, yields will no longer look so enticing. Even the relevance of the valuation measure most often applied in a crisis - the ratio of a company's share price to the book value of its assets - has been called into question. Usually this is considered a reliable market indicator even in the most extreme conditions. For the Hang Seng Index, a price-book ratio of more than three has historically been an excellent sell signal, while a ratio falling towards one flags a great buying opportunity (see the second chart below). Well, the Hang Seng's price-book ratio dropped as low as 1.1 at the depths of October's sell-off. And even now it is hovering at around only 1.3, which should still indicate excellent value. But some wary analysts are cautioning that, given the severity of the economic slowdown and the looming threat of deflation, assets are being carried on companies' books at unrealistically high values. As a result, the price-book ratio may not be as reliable as commonly thought. Such doubts are not surprising. In roaring bull markets, optimists invent reasons why traditional valuation measures are no longer valid, to support their assertions that prices can go on rising. In the same way, in vicious bear markets, pessimists tend to think up reasons why usually reliable valuation measures no longer apply, in order to argue that shares can continue falling. It's greed and fear yet again, which explains why the one short-term prediction we can make with confidence is that investors will continue to blow hot and cold towards the market, and that stock prices will remain volatile for a good while yet.