The benchmark BSE Sensex touched a high of 32,000 on Thursday, propelled by a sharp drop in India’s retail inflation data for June and dovish comments from US Fed Chair Janet Yellen, but concerns over excessively exuberant valuations are bubbling up.

Despite the euphoria on Dalal Street, experts are not convinced about the fundamentals and the technicals of the rally. The current bull run is being compared in some quarters to the dot-com bubble of 2000 and the lead-up to the financial crisis of 2008.

The Sensex rose 232 points, or 0.73 per cent, to close at 32,037 on Thursday. The Nifty gained 75 points, or 0.77 per cent, to close at 9,891.

Sunil Singhania, CIO-Equity Investment, Reliance Mutual Fund, said: “There is no pick-up in corporate earnings to support the bull run. We are at least 18 months off from a revival in corporate earnings cycle, contrary to what markets are currently projecting.”

Another mutual fund chief raised concerns about the frothy performance of this year’s new listings.

The Sensex has rallied by over 25 per cent in 2017. The Nifty, India’s widely tracked derivative index, has risen without any meaningful correction from 7,893 on December 26, 2016, in the aftermath of demonetisation.

No larger participation But the broader market is losing momentum, and many stocks are not participating in the rally. For instance, 68 per cent of highly liquid stocks were trading above their 200-day moving average (DMA) till March this year. That number is now down to 57 per cent, indicating a reversal, data from Sharekhan-BNP Paribas shows.

When the Nifty was near its 52-week high of 8,968 in September 2016, the percentage of stocks above the 200 DMA fell below 60 per cent. This was followed by a 12 per cent fall in the index, which bottomed out in December, when only 44 per cent stocks were trading above their 200 DMA.

“There is no logic in market rallies any more,” said Saurabh Mukherjea, CEO Ambit Capital. “Every 24 hours after US markets rally, stocks in India go up without a reason. Talk of physical assets getting transferred into equity are adding flavour.”

Global scenario, similarities to past bubble

While most global stock indices were below their peak levels by 2-5 per cent and struggling to race past the record levels, it is only Sensex, Nifty in India and Dow Jones index in the US that were scaling new peaks almost every fortnight.

“Most global indices have lost momentum and charts and all other derivative indicators suggest Sensex and Nifty are in an extremely overbought zone,” said Rohit Srivastava, Fund Manager, BNP Paribas. “We are replicating the dot-com bubble. Index longs by foreign funds are being cut with every new level amid euphoria.”

“India’s corporate earnings to market levels are lower than what they were in 2008 and similar to 2000 dot-com bubble,” said Rishi Kohli, CEO, ProAlpha Capital. “Recent market peaks were also associated with fall in client or retail category derivative open interest, which is playing out again now.”

Key Market risks

Nifty valuations are at 10-15 per cent higher than last 10 years average.

India VIX is at its bottom. When Nifty and VIX are inversely correlated it reads as a bear market rally or a move that cannot sustain itself at higher levels. VIX captures the lack of momentum in the market.

Long-term analysis shows usually mid- and small-cap stocks, on an average, usually trade at 15-20 per cent discount to the large caps. That discount doesn’t exist now.

IT and Pharma stocks are a in bear market. The support for rally is mainly from banks and Reliance Industries. How far can they go?

FPIs reducing net longs on index futures and markets are now mainly supported by inflows from domestic funds

Geo political risk at all time high amid US and North Korea military escalations.

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