MIDEAST STOCKS-UAE mkts extend rally, some say overheating

* ENBD's Q1 earnings boost stock's 2013 gain to 79 pct

* Six Dubai stocks gain more than 3.0 percent

* Kuwait trading volume hits 14-month high

* But weighted index far underperforming main index

* Qatar still lagging most of Gulf in anaemic turnover

By Matt Smith

DUBAI, April 25 (Reuters) - Stock markets in the United Arab Emirates reached fresh multi-year highs on Thursday as trading volumes increased, but some said valuations were starting to appear stretched and a short-term correction could be imminent.

Dubai's index .DFMGI climbed 1.1 percent to its highest close since November 2009 as trading volume hit a two-week high. The index is up 27.9 percent this year.

The benchmark now has a 14-day relative strength index (RSI) reading of 76.7, with 70 and above considered an overbought signal, and some analysts said this could prompt retail investors to take profits - though any pull-back would probably be brief.

"UAE markets look slightly overheated - they're running ahead of company fundamentals, so a correction is warranted," said Sankar Kailasam, Gulf Baader Capital Markets head of asset management in Muscat.

"If fundamentals do catch up, then more long-term money will come into the market."

Emirates NBD ENBD.DU was the main boost to the market on Thursday with a 2.2 percent gain. The bank's shares are up 78.9 percent this year; it reported an estimate-beating 31 percent rise in first-quarter profit before the opening. ID:nL6N0DC07J

"The quality of earnings of the bank has improved over the previous year," Global Investment House wrotes in a research note. "ENBD has managed to rope in its operating expenses."

Six stocks gained more than 3.0 percent, including Dubai Financial Market DFM.DU and Drake & Scull DSI.DU , which rose 3.5 and 3.6 percent respectively.

Abu Dhabi's measure .ADI climbed 1.0 percent to its highest close since November 2008, taking its year-to-date gains to 25 percent. Its 14-day RSI is now at 82.9.

"The catalyst is still the UAE recovery story and the anticipation of strong returns for listed companies exposed to that recovery," said Marwan Shurrab, vice-president and chief trader at Gulfmena Investments.

"We should start to see stock upgrades by research houses to take into account strong Q1 numbers."

In Qatar, the index .QSI fell 0.7 percent, trimming its 2013 gains to 2.8 percent. It is the second-worst performing Gulf benchmark after Bahrain, with regional investors more interested in other markets.

Doha traded 24.6 million shares this week; Dubai's Drake & Scull saw 72.4 million shares change hands on Thursday alone.

"The pace of Qatar government spending is not matching investor expectations and there has been some frustration building up," said Gulf Baader's Kailasam.

Trading volume in Kuwait hit a 14-month high as the main index .KWSE took its gains to 22.8 percent this year. The weighted index .KWSEW , which takes into account companies' market value, is up 8.2 percent in 2013.

The differing performance of the two measures shows small-cap stocks are the main drivers of Kuwait's rally. Institutions typically trade only in heavyweight stocks.

"It's pure speculation - everyone is positive on the market and there are huge volumes coming in," said a Kuwait fund manager who spoke on condition of anonymity.

Retail investors are borrowing from banks to fund market speculation, he added, boosting volumes.

"They are willing to take on greater risk and put more money into small caps - these stocks were undervalued at the start of the year but are looking over-priced.

"Investors don't mind risking say some 5 percent of this year's gains because they're already up 20 percent or more - the weighted index is a better indicator of the real performance of the market."

Sixteen company stocks rose more than 5.0 percent and all have market valuations of less than $320 million.

National Bank of Kuwait NBKK.KW is the market leader and is valued at $15.1 billion, according to Reuters data. It fell 1.0 percent on Thursday.

Of the 10 largest Kuwaiti stocks, four fell, one rose and six were unchanged.

THURSDAY'S HIGHLIGHTS

DUBAI

* The index .DFMGI climbed 1.1 percent to 2,076 points.

ABU DHABI

* The index .ADI rose 1.0 percent to 3,288 points.

KUWAIT

* The measure .KWSE climbed 0.8 percent to 7,288 points.

QATAR

* The benchmark .QSI fell 0.7 percent to 8,593 points.