Will there be a Santa Claus rally this Christmas?

QUESTION: The stock market has been falling for almost two months now and there seems to be no end to it in sight as selling continues to drag the index lower. I plan to buy some stocks but I am not sure if the market will rebound soon considering all the negative concerns. Can you advise me?—Janet Areola by e-mail

A: It is hard to buy stocks when everybody is selling or avoiding the market but this may be the best time for you to start buying. Two months ago, I wrote in the column “Where is the market headed?” that the stock market was bound to fall soon and it would be great to start looking for bargains once the market has fallen below the 6,000 level.

At that time, the market was at 6,400 level and there was no sign of weakness as the market was on a rally mode. It was going up strongly as if the worst was over only to peak at 6,600 before the massive decline began.

Now that the market has fallen by 14 percent since then and is now below 6,000, it may be a good move to start buying back blue chips slowly because sooner or later, when the market recovers, these will be the first ones to rebound strongly.

While it is possible that the market may fall further, probably by 200 points more as the index may test the 5,500 level soon, this is not a reason for you not to begin accumulating shares because you may never catch them at the bottom.

As the market continues to be bothered by recurring concerns about the possible tapering in the United States, this is a good opportunity to buy stocks that offer great value. Blue chip stocks that have fallen by at least 20 percent from its 52-week high should be a good candidate.

Among the reliable big cap stocks that you can consider are PLDT (-20 percent; 16x P/E), Meralco (-37 percent, 16x), Ayala Land (-33 percent, 30x P/E) and SM Prime (-32 percent, 22x P/E). Note that some of these stocks, though relatively cheaper now, still enjoy market premium with higher than market average P/E of 16x because they have historically commanded strong following from foreign investors.

Other index stocks that you can consider buying are those that have substantially fallen from its 52-week high by at least 40 percent and currently offer attractive P/E valuations. These  are First Gen (-53 percent, 8.6x P/E), Metrobank (-49 percent, 7.6x P/E), Manila Water (-47 percent, 7.8x P/E) and LT Group (-49 percent, 10x P/E).

These stocks are candidates for value investing that can give you exceptional returns, but you may have to do some research to validate their valuation. Not all stocks with low P/E are worthy because there may be legitimate concerns on why investors are dumping the stock.

It is true that buying stocks when the market is falling is like catching a falling knife because continued decline in stock prices can result to more losses. However, the risk of further downtrend from here on becomes lesser considering that the market has been falling for almost two months now and it is currently oversold.

This situation is further supported by the fact that historically, the last five trading days of December that occurs normally between Christmas day and New Year always result in higher stock market index. This final week market recovery, commonly known as Santa Claus rally, is attributed to several factors.

Some say market players buy back the stocks that they sold for tax purposes in December in anticipation of a strong market rally in the first two trading days of the year, known as the January effect. Others believe that listed companies and fund managers push the stock prices to window dress their market capitalization and portfolio for a better year-end record.

Whatever the real cause is, it is likely that Santa Claus is coming to town. A look at the last five trading days of December in the Philippine Stock Market for the last 28 years since 1985 shows there has been a Santa Claus rally in 86 percent of the time. The average return after five days was about 2.3 percent. If you look closer at the last 10 years since 2002, Santa Claus also came in 80 percent of the time and the average return was about 1.5 percent.

In other words, if you start buying now up to Dec. 19, the first day of the last five trading days of the year, you should expect a positive result based on historical returns. If you hold on to your stocks up to the first two days of January, you should get much higher gains.

The probability of a stock price rise from the start of the Santa Claus rally up to the end of January, in effect, is 93 percent based on historical data. The average return for the past 28 years was 3.5 percent. This doesn’t differ much if you compare it to the last 10 years where the average was 3 percent.

If you expect the index to increase during this period, you can use the expected return as a guide and buy high-beta stocks. For example, Megaworld has beta of 1.81. This means that for every 1-percent rise in the PSE index, the stock will go up by 1.81 percent on the average. If you buy this stock during Christmas and sell it in January, you could expect to gain 5.4 percent. You get this by multiplying the expected return, which is 3 percent, by the beta of the stock.

Are you ready to buy? Never mind if the crowd is not buying. You don’t need to wait for everyone to jump into the market before you buy. This is your best opportunity. The time to buy is now.

Henry Ong is registered financial planner of RFP Philippines. To learn more about financial planning, attend our FREE personal finance talk on Jan. 9, 7p.m. at PSE Ortigas. To reserve, e-mail at [email protected] or text <name><email><RFPinfo> at 0917-3464126.