Indian stock markets seem to have defied the law of gravity as stock indices continue to move in one direction: up. The Bombay Stock Exchange’s Sensex closed above the 17,000 mark, at 17,150 and created another history of the fastest 1000: it took only seven trading days to move from 16K to 17K. Naturally, investors are euphoric and to add to the jubilation, the advocates of the bull market are already selling the dream that by December, the Sensex would touch 20,000. A large part of this bull run could be attributed to the immense liquidity fuelled by mutual funds and foreign investors. Should the retail investors also join the party?

There is no doubt that many strong factors have pushed the Sensex to a record level but small investors need not get carried away by the exuberance which can prove to be irrational and dangerous. There are already signs of various pressure points that can dampen the rise of the market in the future. The 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 export-oriented businesses, including software export. It is also true that the meteoric rise in the Sensex is to some extent misleading because a handful of index-heavy stocks have pushed it up and prices of many midcap and smallcap companies have either stagnated or moved up slowly. No wonder the BSE Midcap and Smallcap indices are trailing the Sensex growth with a big gap. It also indicates the cautious approach of small investors who are yet to jump on to the bandwagon. Having suffered large losses from the sudden crash in mid-May 2006, retail investors and small brokers are yet to recover from the shock.

Market analysts, however, believe that retail investors will soon join the party by picking up growth stocks available at good bargain. Riding on a strong economic growth, several favourable factors will fuel the strong sentiment. Corporate earnings is expected to be good, tax collections are on expected lines, forex reserves are mounting, the  monsoon is expected to be normal, agricultural output is expected to be better than last year and inflation is under control. All these obviously mean that the long term investment prospects for the country is attractive. A fast-growing economy and a large domestic market provides good opportunity for return on investments. But retail investors should be very selective in stock picking.