Today, after over a year of struggles and defeats, the bulls have reached a comfortable level to kiss 16K on the Sensex. The market is set to open higher and the next resistance for the Nifty is 4850 level.
Risk appetite seems to be improving by leaps and bounds. Consider this: the prices of the most traded risky European and US loans have touched 12-month highs. Stocks and commodities are soaring. Emerging market currencies are firming up while the dollar and yen have taken a beating. Investors are also deserting government bonds. Upbeat reports on manufacturing and housing sent the S&P 500 past 1,000 for the first time since November. New US vehicle sales have hit an 11-month high in July, mainly due to government incentives.
Back home too, there are a number of new "green shoots" that could propel the key indices to new 2009 highs. Earnings have been good. Auto, steel and cement sales continue to climb. Manufacturing output remains promising though exports are still in a limbo. Fiscal deficit and its attendant offshoots like high interest rates and spike in inflation could pose challenges. But, the bulls are in no mood to contemplate such ills.
There are concerns on valuations as the market may have risen too far, too fast. Some correction is imminent after a sharp surge. So, one should not get carried away by seeing stock indices breach new milestones. The continuation of a rally is going to be dependent on leading economic indicators showing strength and a commensurate reflection in corporate earnings.
Japan's Nomura Holdings has downgraded developing-nation stocks to "underweight" from "overweight" in its recommended portfolio because valuations look "stretched." The rally in emerging-market stocks has pushed valuations to 17.8 times companies’ reported earnings for the past 12 months, the highest level since the MSCI index peaked in October 2007. That exceeds the ratio of 17.2 for the S&P 500.
