The benchmark Saudi Arabian index rose above the psychologically important 7,000 point mark in heavy trade on Wednesday to its highest level since October 2008. Since the market peaked just below 7,000 points in 2010, this area would be a logical place for momentum to fade.

"Given that the rally is up about 19 percent from the recent trough (in October), I think there is room for a small correction before higher levels can be attained," said Sleiman Aboulhosn, assistant fund manager at Dubai-based Al Masah Capital.

But he conceded that valuations did not indicate any need for a pull-back. "I don't think that valuations are stretched — the only short-term threat is technical," Aboulhosn added.

Fund managers said Saudi stocks were trading at roughly 12 times this year's projected corporate earnings, compared to 18 times at the end of 2010 and 23 times at the end of 2009.

"You can find a lot of opportunities in the Saudi market — valuations look appealing in the petrochemical and banking sectors, but selectively," said Fadi Al-Said, Dubai-based head of investments at ING Investment Management. "The main opportunities can be found in the mid-cap level."

Heavyweight petrochemical and banking stocks have rallied hard in recent days as investors have shifted focus from small-cap speculative stocks into companies which are traded more in response to fundamental economic factors. "We like banks on valuations and earning power and robust balance sheets. There are clear signs that balance sheets are starting to grow again," said Al-Said.

Saudi bank lending to the private sector rose 10.7 percent in November, its fastest growth rate in 31 months. Growth remained high at 10.6 percent in December, according to the latest official data.

Meanwhile, rising global oil prices are boosting shares of Saudi petrochemical firms, because they have access to cheap domestic feedstock.

Saudi Basic Industries Corp., the world's largest chemicals producer by market value, rose more than 5 percent this week to above SR100 per share. Technically, it triggered a bullish reverse head & shoulders pattern formed by the lows since last August, and pointing up to the 110 riyal area.

The Dubai market's rally is more vulnerable, partly because local companies remain threatened by weakness in the real estate industry, where property prices and rents have not shown clear signs of recovering, fund managers said. The stock index is up 19 percent year-to-date and at its highest level since May 2011.

"Dubai looks closer to stalling and moving into a pull-back lower, or a sideways consolidation," said Bruce Powers, Dubai-based head of research and analysis at Trust Securities.

"The rally in Dubai has been very strong with the index breaking through a number of potential resistance levels with little hesitation. It isn't happening yet, but at some point possibly very soon, profit-taking will increase and move the market lower."

However, fund managers said stocks in the United Arab Emirates were trading at about 10 times this year's projected earnings. That is more expensive than 9.6 times for Dubai at the end of 2011 and 8.9 times at end of 2010; for Abu Dhabi, the multiples were 7.9 and 9.6. But it is still not high by historical standards — Dubai was around 14 times at the end of 2007, before its property slump. "PE multiples point to the fact that markets are still undervalued, but this is not news," said Al-Masah's Aboulhosn.

"Regional multiples have been very attractive for a long while now, but the markets lacked a catalyst to trigger buying as we delved deeper into the bear market during the course of 2011. Optimism is returning now, but the overall situation in the GCC (Gulf Arab markets) remains somewhat fragile."

Egyptian shares may move sideways next week as the market consolidates after a rally that has thrust the benchmark index up by almost 40 percent since the start of the year, analysts said.

The index has soared since early January, when the government announced it was seeking a much-needed support package from the International Monetary Fund and after the successful conclusion of parliamentary elections. In the next few weeks, however, companies will announce their fourth-quarter earnings, and these could dampen the mood. "I think on the results you might get a big bath," said Mike Millar, head of research at Naeem Brokerage.

"It's been such a bad year. Companies might take advantage of that to have a clean-out at year-end to help the results for next year, to clean out all of the rubbish to have a clean base going into 2012. "You shouldn't be surprised to see that the fourth quarter is pretty bad across the field."

The market is waiting for a date to be set for a presidential election, now expected to take place as early as May. The fixing of a date would be another sign that Egypt's transition to democracy was on track and could give a boost to share prices, analysts said.