It has been a rollercoaster on the bourses these last three weeks. On October 17, the Sensex touched its peak (17,326) for the current year, up a dizzying 112.33 per cent from its March 9 (8,160) trough. At such levels, valuations were getting stretched. Clearly, something had to give. By November 3, the Sensex had fallen 11.09 per cent from its peak value. Just when it appeared that a rout was in the offing, the markets staged a recovery in the last three days of last week.

Stretched valuations

One reason why the market declined, as said earlier, was that valuations were getting stretched. Consensus estimates for Sensex earnings per share (EPS) are Rs 925 for FY10 and Rs 1,100 for FY11. At around 17,000, the forward PE had gone up to 18-18.5 times FY10 earnings.

Negative international cues

The biggest driver of the current bull run that started in early March is the Rs 68,410 crore that foreign institutional investors (FIIs) have invested in Indian equities till date this calendar year. Hence the fate of the Indian market has become closely inter-linked with that of the global economy.

Internationally, a recovery is on. In the third quarter the United State’s GDP grew by a healthy 3.5 per cent. Housing and car sales have picked up. But on the negative side, unemployment remains in double digits. Some economists also are also of the view that the economic growth visible currently is being driven by the support that the government is giving for car and house purchases.

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