The feel good party for many an investor has been spoilt, with the Sensex plummetting by almost 470 points in the last three trading sessions. A market capitalization of Rs 1.70 lakh crore, say reports, has been eroded in just three days.

While market doomsayers have not exactly made a comeback, the latest CLSA Asia-Pacific Markets report says that the risks of a correction have grown due to the Indian stock markets having shot up since November 2003.

The first significant correction is likely to take the Sensex down 13 per cent-24 per cent, but this will set up another good buying opportunity for investors, the report says.

In local terms the BSE Sensex has edged above the 6,151 all-time high set in February 2000 (to touch 6250 on January 9, 2004) and the market remains "very overbought and stretched," CLSA warns.

However, the report says: "Although the risks have grown there is as yet no evidence that a significant correction is underway."

"Since the steep advance from the May-2003 low began at 2,904, there have been five setbacks of between 5 per cent and 8 per cent. The decline from the January high of 6,250 is the sixth minor correction. At the 5,871 low, the Sensex was down 6 per cent in line with the other minor declines," it says.

The PN, profit-booking mayhem

One reason put forth for the dropping market by analysts is that a section of high net worth investors is booking profits ahead of the general elections, anticipating some political uncertainty.

But the major reason is that traders have offloaded huge leveraged positions in the derivatives segment with some foreign funds selling on fears that the government might curb hedge funds from using participatory notes in the local market.

The market fears that if hedge funds are banned from investing in the Indian capital markets through the derivatives instrument -- participatory notes -- the sentiment in the market will dampen, leading to a further fall in the markets.

But the government says that such a move will make the Indian markets safer for the investor.

The plummetting markets may also adversely affect the government's plans to mop up a sizeable amount through the sale of its stake in some major public sector oil and other companies.

'Market can touch 8000 levels'

Yet, CLSA remains bullish on the Indian markets and says that its "preferred road map for India calls for an eventual move to the 8,000 area."

"The September-2001 low of 2,595 ended the bear market that started in February 2000 at 6,151 -- a decline of 58 per cent. At 2,595 the index had reached the lowest level for eight years. Our key view is that a multi-year correction ended at the 2001 low and, at a minimum, a major five-wave advance is unfolding," says the CLSA report.