Historical patterns suggest that any correction will be of the order of at least 15-20 per cent, as and when it does occur. If you've stopped buying sometime in this huge move, it is sensible to continue holding off until prices do react.
Any entry now runs the very high risk of being left with holdings bought at a 30-month peak.
Nevertheless there is a sneaking fear that the bull run will continue indefinitely. One line of logic could justify such a fear. Corrections in bull markets occur for two reasons: 1) Some news changes market sentiment. 2) Profit-taking releases large supplies.
While the news continues to be good and the winners refuse to book profits, bull runs continue. On the news front, there is little likely to abort the rally.
A new terrorist outrage, or some act of God, or a war could trigger a collapse certainly. But such imponderables apart, the monsoons have been good; elections are still some distance away and all the signs point to rising profits.
There has been a change in the nature of the money during this rally. It has been driven to a very large extent by foreign institutional investor portfolio funds and even domestic funds have not been borrowed at high costs.
That altered nature of financing is probably what has prolonged the rally beyond hitherto-normal limits.
Most previous Indian bull runs have been heavily influenced by the leveraged short-term financing that Indian operators are prone to use.
Highly leveraged financing ensures profit-taking at regular, more or less predictable, intervals.
This time round, the real cost of capital is lower for Indians than it has ever been; just factor in a combination of lower rates and increasing comfort with derivatives. So, the Indian bulls of 2003 definitely possess more stamina than their predecessors.
The nature of the FII funding pattern is less penetrable. A lot of the FIIs bring in long-term funds, seeking to embed themselves in value plays. Some, however, operate more actively and there's been a lot of anecdotal evidence about interest in Indian plays from hedge funds.
Hedge funds are very "hot" players; they enter and exit at the drop of a hat.
We don't actually know if the "hedgers" are here in significant numbers. If they have substantial positions and they do book profits, there would be a correction.
The hedgers may see an exit-trigger in rising US yields and the early signs of an equity turnaround on Wall Street. They would certainly book profits, if the dollar improves against the Euro, or if European markets show a recovering trend.
Vis-a-vis other developing markets, India looks well-placed to continue attracting portfolio and hedge-fund financing. The rally started later here compared to Asia-Pacific and Latin America.
All in all, there are a few key questions for Indian investors and we do know most of the answers. Will there be a correction in Indian stocks? Certainly.
Is the correction likely to pull price down below current levels? Most probably. So if you're out, stay out. If you're in, set trailing stop losses and enjoy the ride!