Is KSE overheating?

On August 10, 2009, before which the KSE-100 index was hovering around 7600~7800 points, this column argued that the Karachi stock market "would likely see the index at 10,100 points by the end of third quarter fiscal year 2010".
And so, after several failed attempts to cross the psychological barrier, the 100-index finally managed to hit 10100-level in the week before last.
Back in August, the article also projected a potential overplay of "300~400 points on account of those investors who wake up late and get blinded by valuations". This is where, the August issue seems to have misjudged, as few could have expected the kind of huge foreign portfolios inflows witnessed of late.
Data released by the NCCPL shows that March alone saw foreign inflows of more than $100 million - the biggest since September 2009 - taking the total offshore stake in the local bourse to more than $2.1 billion, according to central bank data.
But this is perhaps as big as it can get. Based on current position of outstanding shares, the amount of foreign stake equals about 23 percent of the free float. This is just an inch away from the highest ever foreign stake of 27 percent (in terms of free float) seen during the peak times of April 2008.
Portfolios inflows in other frontier and emerging markets are reported to be on the boil, making some regional analysts less optimistic.
"Given their gains, I wouldn say that we
e finding screaming value in some of these markets", Hugh Young, who helps manage billions of assets in Sri Lanka, Pakistan and Nigeria for Aberdeen Asset Management Plc in Singapore, is reported to have said last week.
If Youngs hypothesis is right, then KSE growth story will likely be checked soon. So far, foreign inflows have been able to offset the series of bad news which is supposed to be priced-in by now.
But when foreign flows stop, amid persistent selling by local investors, it would force the market to start incorporating the issues.
Top on the list would be political uncertainty arising from NRO - especially the fears of a tussle between the judiciary and the president - followed by the second round of inflation, and fiscal constraints stemming from the absence of foreign loans/aid and stagnant revenues.
"The outlook for 2010 will depend largely on the successful introduction of value added tax (VAT) and a resolution of the crippling power crisis. Both these issues are critical for sustaining the recovery and bringing down inflation," says Sayem Ali, economist at Standard Chartered Bank.
Yet, Fridays sharp rise has turned many floor traders excited, with technical chartists talking about a breakout above the key resistance of 10260 points, amid select buying by local mutual funds.
If the enthusiasm continues, prices may be propped up to 10700~10900 index points on any good news, such as the smooth ratification of the constitutional amendments tabled last week. Still, chances are the rally will lose its steam sooner or later.
For investors, who have enjoyed the move since August, perhaps it is time to book gains, because the conventional Buffet wisdom suggests when everyone gets bullish start booking profits. For those who would still like to ride the rally, making stop-loss orders along the way might be a good move.