Chart shows the count of BSE-500 stocks that have been trading at P/E multiples of greater than 30 times at different time periods. The highest count was in, as expected, the heydays of 2007 end, just before the bubble was about to burst. As we stand now, the count is again on the rise. Is this a warning bell of an impending correction? It seems to suggest so!

Retail investors and domestic institutions are cashing out of the market. As a result stocks are facing a foreign invasion. FIIs now control 1/3rd of the free float (shares not held by promoters) of the top 500 stocks on the NSE. In the 2007 rally, FIIs reduced their holdings as the markets trended upwards. This left retail and domestic investors in the soup when the imminent crash came. In this rally, FIIs are the only ones moving the markets. As of June 2010, FIIs held 31.8% of the free float while retail investors held 18.4%. Three months later, FIIs hold 34%, while retail investors hold 17.8%. Indian investors seem to be following the 'once bitten, twice shy' philosophy. Anyway, at these overall stretched valuations, the downside risks are high.

By J Mulraj