If history is any guide, the current surge in the stock market, which recently breached the 8,000 level, may likely be sustained in the next few months, until probably by year-end.
Earlier this year in January, I wrote in my column “Is the stock market poised for a bull run this 2017?” that there is a good chance that the PSE index will end the year with a record high.
This is because historically, the stock market tends to be bullish a year after the proclamation of a new president. In all four presidential proclamations in the past, the PSE index all ended on a positive note the following year.
Assuming this historical pattern still holds true, the minimum that we can expect the stock market to achieve anytime this year is a record high of 8,698.
This target is conservatively derived using the smallest historical gain of 15 percent achieved by the market during the time of President Estrada against the closing index of 7,564 when President Duterte was proclaimed last year.
Last month, I also mentioned in this column “Are you afraid of the ghost month?” that while empirical evidence shows that stocks in general do perform positively during the ghost month contrary to market superstition, it is interesting to note that when the market ends the ghost period on a negative note, it tends to sustain its losses in the following months.
However, if the market closes on the positive, there is a good chance that it will sustain its uptrend up to 15 percent in the next two months based on historical data for the past 18 years.
Last Sept. 19, the market closed the ghost month on a positive note as expected at 8,162, up by 1.8 percent from 8,015 when the period started. Assuming a minimum historical gain of 7 percent, market data show a 67 percent probability that the PSE index may sustain its uptrend towards 8,733 before year end.
According to historical tendencies, either scenario seemingly points to a strong stock market in the coming months. Although the PSE Index has slowed down the past few days with minor pullback toward 8,100, it is normal to expect share prices to consolidate after a healthy price uptrend.
Perhaps this maybe the best time to accumulate some stocks in anticipation of another upswing in the market. Keep an eye on stocks that will directly benefit from the strength of the market.
Stocks that have high correlation with the PSE index are likely to benefit from the market bull run. Now, in order to estimate the impact of the market on the share price, you can check the beta of the stock.
A stock with a beta of more than 1.0 means that it is more volatile than the market. So if you are expecting the market to move up, a stock with high beta will give you higher expected returns. However, if the market reverses, the same stock will also result to greater losses.
Based on the past 300 trading days, there are only 20 stocks out of 304 in the PSE that have high correlation with the market of at least 40 percent. These top stocks include SM Prime Holdings (70 percent), Ayala Land (70 percent), SM Investment ( 69 percent), Ayala Corp (66 percent), BDO (63 percent), JG Summit (63 percent), Megaworld (57 percent), BPI (57 percent), PLDT (54 percent), Metrobank (53 percent) and Aboitiz Equity Ventures (50 percent).
Stocks that have high correlation with high beta are likely to outperform the market. Let’s say the PSE index is expected to hit 9,000 level this year. The resulting gain of 10 percent will mean higher gain for high beta stocks.
For example, Ayala Land, which has a beta of 1.33 will have expected return of 13.3 percent. Other high beta stocks in the list are SM Prime (13.1 percent), Megaworld (13.6 percent), JG Summit (13.2 percent) and SM (12.1 percent).
On the other hand, the low beta stocks maybe more stable but less volatile. Because of this, a 10 percent rise in the market will mean lower returns for some of the low beta stocks such as BPI (6.9 percent), Aboitiz Equity (7.6 percent), URC (9.7 percent), and Jollibee (9.3 percent).
While there is a good reason to expect the market to continue to rise in the coming months, it cannot be discounted that there is a chance that the law of averages may be broken. Always manage your risk and preserve your capital.