Current share levels cry out for investor caution, as the index is now trading at more than 12 times forward earnings amid optimism about a full economic recovery going into 2010, said Tisco Securities.
Wiwat Techapoonpol, marketing director at Tisco Securities, said growing risk appetite and optimism over economic trends had clearly supported the run-up in the market over the past few months.
The SET index, which closed yesterday at 640.16 points, has gained nearly 50% over the past six months and is up 42.5% since January.
While further gains may be seen this month, investors should exercise caution going into September, as speculative selling, currency volatility and a scheduled revision in the MSCI benchmarks may trigger a sell-off, he said.
"At this level, the SET index reflects future earning growth for 2010 of 25% and economic growth at 3%, which is somewhat higher than expectations. It may be risky if the economic recovery performs lower than expected," he said.
Second-quarter operating results, which have generally outperformed expectations, would help support further short-term gains, he said.
Foreign investment inflows will also help push up prices, with foreign investors expected to be net buyers of 10 billion baht for this month, compared with a net buy of 9.04 billion in July and 13.8 billion in June.
Mr Wiwat said the SET index could reach 666 to 700 points this month, but that a correction would then follow, possibly by 100 to 150 points from its peak in the current cycle.
Investors should exercise caution for now, particularly as foreign investors will move to revamp their portfolios after the MSCI benchmarks are revised.
"The dollar also should be closely watched, as the current SET rally is being driven by hedge fund flows," said Mr Wiwat.
"Funds may look to cut back their positions if the dollar appreciates, leading to a fall not only in share prices but also in oil and gold prices as well."
Investors should monitor the dollar index, which tracks the dollar against other key currencies. The index currently is tracking a year-low of 77.6, compared with 78.36 last Friday.
"If the US dollar index hits 80 points, then hedge funds may sell quickly," he said. An index of 80 points would be equivalent to the baht trading at 34.2 to the dollar, compared with current rates of 33.98.
Paiboon Nalinthrangkurn, the chief executive officer of Tisco Securities, said the Thai capital market may maintain its current 2% weighting in the MSCI Asia ex-Japan index.
But he agreed that Thai and Asian markets could face a sharp correction if hedge funds pull back their investments to take profits.
"Asian stock prices, according to price-to-earnings ratios, are now trading at a ten-year high. Certainly the Thai market is fully valued at present," he said.