Rally may still have some steam left, given rampant skepticism

Santosh Nairmoneycontrol.comIt is brute money power on display in the stock market. So much that fundamentals don’t matter for the moment. Every conventional parameter seems to suggest that it is time to be booking profits. The much talked about earnings recovery is happening at a far slower pace than expected, the bad loan problem at banks has some way to run, capex cycle is yet to pick up and inflation has moved out of the comfort zone. But stock prices are soaring, even in sectors that are facing serious problems.Veteran brokers say prices could continue to rise for some more time.For one, there are not too many leveraged positions in the market. Bulge bracket market operators are trading within limits, and so are most professional traders. Retail investors are missing in action and brokers say the last time they saw frenetic participation from the retail players was in the run up to the May 2014 elections and a couple of months after that.Two, there is too much foreign capital flowing in as global investors are reallocating money out of some of the European markets into emerging markets. In July so far, FIIs have already net bought close to USD 1 billion worth of Indian equities Third and most importantly, too many people are still cautious on the market. The caution is understandable considering that share prices are now beginning to look expensive in the context of corporate earnings growth. But veteran stock market players never tire of repeating the adage that a bull market is never over till the last bear has given up hope. And as one market expert said in an panel discussion on CNBC-TV18 today, prices have still not entered the ‘irrational zone.’ Investors are pricing in an optimistic scenario about a macro recovery as well as uptick in earnings growth. But the valuations are nowhere as crazy as those seen during the dotcom boom or the 2007-08 bull market. Whether corporate earnings, economic growth and the investment cycle will pick up fast enough in the coming days to justify the high valuations is a matter of speculation. But as long as foreign capital continues to flood the stock market, the focus will be on the stock price and not fundamentals.