Once again Indian stock markets have broken their own record: the rise of the Bombay Stock Exchange’s Sensex to the 18,000 mark was the fastest. This happened barely within a fortnight after Sensex crossed the 17,000 mark. Investors are naturally euphoric and to add to the jubilation, market pundits are saying that by December this year Sensex would touch 20,000. But retail investors, who generally jump into the fray when the market is hot, must know that the latest rise in Sensex is certainly not across the board and is the result of some special factors. First of all, the rise in Sensex was driven mainly by some Sensex heavy stocks, mainly companies from the Reliance group. In the 1000 points gain, for example, Reliance group of companies contributed around 27 per cent, followed by Infosys, Bharti etc. What it means is that the meteoric rise of Sensex and NSE Nifty has not been witnessed in many smaller stocks in the mid cap and small cap range.

The second interesting point is that Sensex and Nifty are driven up mainly by foreign hedge funds which can move out at any time. After the US Federal reserve lowered the interest rates a few weeks ago, global hedge funds have invested heavily in emerging markets, including India.  As against this, domestic mutual funds have either sold their holdings for profit booking or bought very little. The moral of the story is that the huge investments by FIIs (read hedge funds) can be pulled out any time leading to a sudden plunge in stock prices.

Should the retail investors also join the party? They should be extremely selective and stay away from speculative stocks. Small investors need not get carried away by the exuberance which can prove to be irrational and dangerous. Having suffered large losses from the sudden crash in mid-May 2006, retail investors and small brokers are yet to recover from the shock. There are already signs of pressure points that can dampen the rise of the market in the future. Automobile sector, specially sale of commercial vehicles, cars and two wheelers, is getting the first signs of a slowdown. The housing boom has sobered down to stagnation in prices and rupee appreciation is a major threat to the export-oriented businesses, including software exporters. Market analysts, however, believe that the retail investors will soon join the party by picking up growth stocks available at good bargain.