Reliance rally

The Reliance settlement finally pushed the Sensex briefly above 7,000 briefly on Monday, and it ended the day at an all-time closing high.

There was no doubt, however, that it was the Reliance scrips that drove the index, although they were ably supported by the buoyancy in IT stocks.

However, market breadth was far from positive""even the Sensex scrips had 16 declines against 14 advances, while for the BSE as a whole, 644 stocks advanced while 1,713 stocks declined.

The broader market, gauged by the BSE 500 index, gained 0.38 per cent compared to the Sensex's 1.13 per cent rise. The sell-off continued in small and midcap stocks.

There seems to be a lack of confidence in the minds of many market players. To be sure, there's wide expectation that short-covering could move the market up further, but there's none of the euphoria normally present at market tops.

That's also the reason why the gap between the cash market and Nifty futures has been widening, an indication that punters are shorting the market.

Market players also say that there was no real reason for the tech counters to move up so sharply on Monday, and one explanation is that IT scrips have taken on the mantle of defensive plays.

The rise in petrol and diesel prices, too, didn't really impact the market. The market has also ignored concerns about the progress of the monsoons, a slowdown in corporate earnings and a possible rise in interest rates.

Add to that an expected global slowdown in growth and the record current account deficit in the US and it's clear that the markets are shrugging off all these worries. That's typical of a bull market.

Of course, the caution in the minds of market players stems from the simple fact that the market has run up too far too fast. The Sensex has risen by almost 13 per cent since the beginning of May, and a correction is long overdue.

But there could be reasons for the optimism. As the Smart Investor's chartbook points out, the Sensex is actually cheaper than last year if trailing earnings are taken into account.

And although earnings growth is expected to slow going forward, the Indian market is still cheap compared to most other Asian markets. The data on both industrial production and exports have shown a bounce, and commodity prices are making a comeback.

But perhaps the most important reason for sentiment turning markedly positive has been the return of foreign investors to emerging markets. After being negative in April and May, net FII purchases have turned positive this month.

An indication of the appetite for Indian equities among foreign portfolio investors is evident from the fact that, of the $60 million flowing into Asia ex-Japan equity funds in the week to June 15, inflows into India equity funds amounted to $45 million.

Additionally, local mutual funds continue to mop up funds via new schemes. In short, the weight of money is behind the rally. As for the lack of euphoria, that may actually be a good thing, since it could indicate that this rally still has some way to go.