GLOBAL RALLY SENSEX ENDS AT 19-MTH HIGH

Markets in the mood for year-end party

Rising above the din of scepticism, Sensex made merry on Tuesday, setting its sights on climbing new peaks

 INDIAN shares rose to a new 19-month high sailing with global markets which are enjoying the liquidity high tide even as fundamental and technical factors point to a modest 2010. Conventional wisdom that the peak may be closer when penny stocks are the toast of the traders and shoe-shine boys give out stock tips are also beginning to play out. "Markets are trading at the higher end of their fair value at the moment," said Nilesh Shah, deputy MD and CIO, ICICI Prudential Asset Management. "Investors will now wait to see how the government translates its promises on economic growth and reforms into real actions." 

    BSE's Sensex closed at its highest level since May 16, 2008 at 17,401.56, up 40.95 points, or 0.24%, off the day's high of 17,486.05. The S&P CNX Nifty index ended up 9.55 points, or 0.18%, at 5,187.95, after touching the day's high of 5,214.60, its highest since May 5, 2008. A close above 5,200 is required to indicate the continuation of bull run. 
    Benchmark indices have more than doubled from their March lows, as global investors poured in more than $17 billion, expecting a sharp economic growth in India, which has kept its interest rates at record low and doled out fiscal stimulus. The rally in stocks makes many investors feel that they might have overshot their fair value based on their potential earnings. 
    The Sensex is trading at nearly 17 times its expected earnings for the year ending March 2011, according to some analysts. These prices are in expectations of companies delivering strong earnings in the next few quarters, which may become difficult, if the government rolls back fiscal stimulus and the interest rates starts climbing prematurely. Their profitability may also be at risk as commodity prices of copper and steel zoom expecting a sharp global economic recovery. 
    "The Nifty is in the overbought region with the daily RSI (relative strength index) at 75," said Alex Mathews, head (derivatives and technical research), Geojit BNP Paribas Financial Services. "The Nifty is trading above the daily and weekly upper Bollinger band and so, a correction is due," he added. Bollinger band is a technical trading tool used by analysts to study whether a security, or an index, is relatively low priced, or high priced within a band established by a trading pattern. 
FESTIVE CHEER 
What's driving the rally in India? 
Possibility of higher allocation from foreign investors in 2010, better-than-expected growth in the economy, and hopes that there may be no sentiment shattering development in global markets. 
With concerns that shares are fairly valued, should investors still buy? 
Liquidity is expected to stay for the next few months. In addition to foreign inflows, local insurance companies, too, are expected to be big buyers, as they receive maximum premium income around this time of the year. In the short term, liquidity could be the deciding factor, not fundamentals. 
What could possibly upset the momentum? 
Withdrawal of stimulus by central banks across the world and a likely rise in interest rates could undermine sentiment briefly. Penny stocks make a comeback 
THE broader market saw gainers and losers at 1,859 to 964, which has brought to the fore many penny stocks which are mainly ignored by fund managers, but favoured by traders. Some of the stocks that rose 20% on Tuesday are: Foundry Fuel Products at Rs 12.84, Mukat Pipes at Rs 13.58, Rathi Ispat at Rs 7.83 and Gufic Biosciences at Rs 8.68. These are also the times when one gets unsolicited investment advice through SMSes in cell phones screaming "earn Rs 10,000 a day investing in stock markets." It is time to sell when the shoe-shine boy tries to give you stock tips, said Joseph Kennedy, a legendary stock broker and father of US president John Kennedy.