The current rally has added 98% to the SENSEX relative to March 2009 low of 8160 points. The rally is going on for last 5 months, the question is, what is fueling this rally? This rebound will make us believe it is start of next Bull Run. Any prudent investor will try to figure out what has happened since March 2009 that justifies this rally. As always, at hindsight everything makes sense.

With the unprecedented level of stimulus from many different countries, the global economy is showing signs of stabilization. In addition, the rebound of Oil prices in international market seems to give boost to many countries. Accordingly, I believe Indian economy is also showing signs of stability. I think the biggest boost for Indian business sentiment and environment has been the continuity of the pro-reform government at its helm.

Let us look at latest quarterly earnings (relative to last quarter) of the 30 Indian corporations that are included in the SENSEX.

• I compared total income, operational profits, gross profits, net profits, and earnings per share.
• The latest quarter was quarter ending June 2009, and it is measure relative to SENSEX performance for  quarter ending March 2009.
• Red indicates negative, Green indicates positive and Yellow indicates no changes in quarter-over-quarter results.
• Table below shows the mapping of this performance for all 30 companies.

As you can see in the table, there are more positive attributes than any negative indicators. There are now 10 companies (as opposed to seven in March 2009) that are showing positive results across all parameters, while eleven companies are showing negative results (same as before). In the remaining nine (as opposed to 12) companies are also showing mixed results. As one can observe there is marked improvement in earnings for SENSEX companies.

Assuming that one can use SENSEX companies as a trend indicator for any given sector, the sector trends relative to March 2009 quarter are:

• Capital Goods: turned negative
• Finance: stabilizing
• FMCG: continues to be positive
• Housing Related: turning positive
• Information Technology: turning negative
• Metals and Mining: turning positive
• Oil and Gas: turned positive
• Power: turned positive
• Telecom: turned negative
• Transport Equipments: turned positive

At its low point, the SENSEX PE ratio had reached around 10. With this 5 month rally, the SENSEX PE ratio is now at 20.

I would tend to believe this rally has being fueled by the two aspects viz., (1) positive signs in company earnings;  (2) market getting back to the fair valuation after undershooting to PE of 10.

How does it affect individual investor like me?

In simple terms, the buying opportunities have reduced. Many stocks that I have looked in recent past are above my fair value range. If I have to buy them they are at a premium of 15% to 20%. Therefore, I am inclined to hold on to my cash position. Having said that, I believe looking the SENSEX provides only a generic trend. For an average to exists, there has to be companies above that point, and companies to be below that point. So I am continuing to look for opportunities which are below the average point.