* Market sees foreign outflow for 7th straight session
* Rupee down for 3rd day on importer dollar demand
COLOMBO, Jan 28 (Reuters) - Sri Lanka's stock market edged down on Friday for the second straight session on retail profit taking in thin volume as foreign funds continued to exit the overbought and expensive market.
The island's main share index .CSE closed 0.26 percent or 18.62 points weaker at 7,192.49, its third fall this year. It hit a record closing high of 7,261.37 on Monday after touching a new intraday peak of 7,320.22 points.
The traded share volume was 81.5 million, the lowest since Jan. 3, against a five-day average of 139.5 million. Last year's daily average volume was 69.2 million.
Foreign investors sold a net 100 million rupees' worth shares on Friday, extending the weekly net outflow to 779.3 million rupees. They have sold a net 2.8 billion rupees so far in 2011, after selling a record net 26.4 billion in 2010.
The bourse has been Asia's best performer with an 8.39 percent gain in 2011 after being the top performer last year with a 96 percent return. The recent retail buying has pushed it deeper into the overbought region with the 14-day relative strength index at 74.
The bourse is trading at a forward price-to-earnings (P/E) ratio of 18, highest among emerging markets, compared with 13 in Asian markets and 11.9 in global emerging markets, Thomson Reuters StarMine data showed.
Turnover on Friday was 2.9 billion rupees ($25.8 million), more than last year's daily average of 2.4 billion.
The rupee LKR= fell for the third straight session to close at 111.12/18 a dollar from Thursday's 111.10/111.15 on continued strong importer dollar demand, traders said.
FACTORS TO WATCH:
- If December quarterly earnings boost the bourse
- Whether a technical correction will bring the bourse down
- If foreign funds buy shares in large volumes
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