The Hindu Business Line : At peak levels, from here to where?

WHEN the going is good, the party seems to be never ending. It is a seven-month plus FII-led rally on Dalal Street and the benchmark indices are at their all-time peaks.

Even though many in the market think that the indices have reached unsustainable levels, contrarians are hardly visible on the Street. The ruling psychology is to play safe. At the same time, none wants to be on the wrong side of the game. In the process, stakes are increasing at an accelerated pace.

Pouring overseas fund flow has caused a gain of 13.8 per cent for the BSE Sensex during 2004. The S&P CNX Nifty managed to rise 10.68 per cent. The broad-based S&P CNX 500 index, however, climbed up 17.86 per cent year-on-year.

The technical analysis, at this juncture, does not throw up much clue to the market movement in the immediate term except for a general signal for restraint in an overbought market. From the perspective of technical charts, the long- and medium-term outlook is still strongly bullish.

But the oscillators show an overbought state of the market. The short-term momentum indicators call for caution.

The strategies for market players are thus varied. A section of market operators is pushing forward their "vision" of the Sensex reaching 7000- points mark in the short-term. For them the valuations for the Sensex and Nifty stocks are not stretched.

Though not all overseas funds are indiscriminate buyers, the current quantum of liquidity inflow indirectly supports that there are FIIs who are ready to pay higher premiums for the frontline stocks.

The domestic players, including institutions, banks, high networth individuals and retail investors, do not seem to be very comfortable with the current pricing. They have not turned large-scale sellers simply because they do not want to be left out.

But they may not quickly turn aggressive buyers if the foreign liquidity flow falters and the indices slip. The multiplier effect, in such a situation, deepens correction.

This makes the market vulnerable as it gains height. The fear over hot money flooding the market is baseless as long as this does not take place. But a reasonable instinct for profit taking is infectious and the possibility of that is not ruled out in the near future.

However, it is impossible to predict a trend reversal. The market may move ahead further on the back of liquidity until profit booking becomes a compulsion. The third quarter results, which are round the corner, will provide some indications for future valuations. But they may not necessarily guide. After all, a stock market is never known to move on a rational path.

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